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Questor: NMC still has potential but there’s no room for such shoddy controls. Sell
Questor share tip: already under attack from a short-seller when doubts emerged about the founder’s stake, it’s no place for private savers
Never mind the balance sheet and the profit and loss. In many cases potential investors are better off studying the founder and their wider family, not the fundamentals of a business, to understand the risks they are putting their money under.
That can often be reassuring. At Associated British Foods, the billionaire Weston family holds its nerve, rides out economic ups and downs and invests for the long term in brands such as Primark and Kingsmill bread.
Less conventional but no less successful is boohoo.com’s fashion tycoon Mahmud Kamani, who bought his son Umar’s website PrettyLittleThing to turbocharge growth.
The risk can be higher if the founder is no longer in charge. Witness the row over dividends a few years back between Sir Stelios Haji-Ioannou and the airline he set up, easyJet.
But that is nothing compared with the ongoing drama between Gulf hospitals group NMC Health and its founder, Bavaguthu Raghuram Shetty.
On paper, Mr Shetty is a man to back. So keen was he to get patients into his first pharmacy in the Seventies he carried them in on his shoulders in lieu of an ambulance. That grit drove him to build NMC into an empire with more than 200 healthcare facilities that treats more than 8.5 million patients a year.
But the rags to riches tale was a long time ago. Mr Shetty resigned as co-chairman of NMC last week having achieved something that Sir Stelios, Mr Kamani and the Westons have never knowingly managed: to lose track of the size of his stake in the business.
Questor first took a look at fast-growing NMC in September 2017, just as it was taking its place in the FTSE 100. The company had done what it said it would do when it floated in 2012, adding bed capacity and focusing on higher-margin treatments such as IVF.
But its shares were trading at such a lofty premium it would not take much to put them in the sick bay, we concluded.
Short-seller Muddy Waters did just that in December, publishing an annihilation of NMC’s finances that raised doubts over asset values, cash levels, profits and debt. The company rebutted all of them, only to instigate an independent review of the allegations a few days later.
And then came the Shetty disclosure, plus news of complicated share dealings involving several other directors that further knocked confidence.
NMC is fiendishly complicated so there should be no place for poor controls. For example, it buys generic drugs from another of Shetty’s firms, Neopharma, and the $170m acquisition of cosmetic surgery specialist CosmeSurge two years ago was from a related party.
Like most founders, Mr Shetty cannot be easily disentangled. His wife remains group medical director. A second venture that he brought to the London market, Finablr, has also performed poorly.
NMC still has potential. Look at the joint venture struck last year with the investment arm of Saudi Arabia’s General Organization for Social Insurance, a government-administered pension fund that covers private sector employees in the kingdom. What it lacks is credibility.
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Earlier questions were raised about how the group presented its numbers. Following interim results in August, analysts at Jefferies, the bank, calculated in October that the underlying growth for NMC’s healthcare clinics was only 8.2pc, despite the company favouring a figure of 13pc that included pharmacy and distribution sales.
The bank also estimated that assets acquired in 2018 were not yet growing the top line. Who knows what surprises will accompany full-year figures due on March 6.
Analysts at Morgan Stanley had set a target price-to-earnings multiple of 20 times for NMC, reading across from Mouwasat, a Saudi Arabian hospitals group that has performed strongly.
Although NMC insists it is on track to deliver full-year results in line with expectations, the shares are trading at about eight times earnings, so deeply has confidence been shaken. This is no place for private investors.
Questor says: sell
Ticker: NMC
Share price at close: 855.2p
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