Persian Gulf hospital operator NMC Health
Plc, where he’s co-chairman and a major shareholder, has plunged as
short sellers targeted the company amid concern its governance is
lacking, it’s taken on too much debt for acquisitions and its accounting
is too opaque. Shares of Finablr Plc, the payments processor he
founded, are trading below their initial public offering price since the
company listed in London last month.
The double whammy comes amid growing investor unease with indebted,
acquisitive companies, in the case of NMC, and, for Finablr, mounting
competition for financial services such as payments and currency
exchange.
Bearish speculators had sold short a record 23% of NMC’s shares
available for trading as of Monday, according to data compiled by IHS Markit
Ltd. Abu Dhabi-based Shetty, along with former director Saeed Bin Butti
and Vice Chairman Khalifa Bin Butti, collectively own more than half of
NMC’s stock, according to the company’s annual report. The shares fell
as much as 2.2% on Tuesday.
“What could be concerning
investors is the company’s high leverage, government revenue exposure
and potential performance of Saudi hospitals,” said Khaled Sadek, head
of consumer and health-care research at CI Capital Holding. NMC’s
management has addressed most of the issues on several occasions, and
they’re already reflected in the share price, said the analyst, who has
an overweight rating on the stock.
Pledging Wealth
While Shetty keeps an eye on
near-term movements in equity markets, the boards and management at both
companies are focused on fundamentals to create long-term shareholder
value, a spokesman for Shetty said in an emailed response to questions.
Both NMC and Finablr are on a stronger footing than at any time in their
history, he said.
Shetty, 76, a native of Karnataka state in southwest India, moved to Abu
Dhabi in 1973 and founded NMC in 1975. It’s now the U.A.E’s biggest
private health-care provider. Last year, he and his wife pledged to give
the bulk of their wealth to philanthropic causes as part of the Giving Pledge initiative founded by Bill and Melinda Gates and Warren Buffett.
Shetty’s stakes in NMC and Finablr combined are worth about 1.6 billion
pounds ($2 billion), according to regulatory disclosures.
NMC shares, which have advanced more than 1,000% since listing in 2012,
have fallen 42% from the record close of 4,120 pence in August.
Jefferies LLC analyst James Vane-Tempest downgraded his recommendation
to underperform in November on increasing execution risks, rising
receivables and corporate governance concerns such as insider ownership
and management remuneration targets.
Margin Calls
In a follow-up note last
month, Vane-Tempest highlighted market concern about the possibility of
margin calls if the share price declines further. Shetty has pledged 7
million NMC shares, equivalent to a 3.4% stake, as collateral against a
loan, a May 2018 filing shows. Khalifa Bin Butti has also pledged NMC
shares against loans, according to a December 2017 filing.
“Shetty feels that this is one of the biggest sources of
misunderstanding, and hence misinformation, in the market today,” his
spokesman said by email, adding that there haven’t been any margin calls
to date and Shetty sees little risk of any occurring. “That being said,
given the sharp focus investors have placed on pledging of shares by
the Butti family, it would not be inconceivable to see at least a
partial reduction in the near term in the number of shares pledged.”
The collar structure under which Shetty’s shares have been pledged
doesn’t provide for any possibility of a margin call, the spokesman
said.
Lone Bear
As for rising receivables at
NMC, It takes longer for invoices to be paid in the United Arab Emirates
than in developed markets because NMC’s primary counterparties are
insurance companies, often government backed, the spokesman said. The
longer time to get paid is more than compensated for by higher margins,
he said.
Vane-Tempest is the lone bear on the stock among analysts tracked by
Bloomberg. Goldman Sachs Group Inc. analyst Harsh Mehta increased his
price target on the stock this month, saying expanding capabilities and
new markets will drive organic revenue growth of about 13% annually over
the medium term.
The stock is an interesting play on the trend of increasing
privatization of health care in the region, said Vijay Valecha, chief
investment officer at Century Financial Consultancy LLC in Dubai, who
has high-net-worth individuals from the gulf among his clients.
NMC has had average revenue growth of about 32% annually the past five
years, more than triple the average for companies in the Stoxx 600
Health Care Index, yet the stock sells for 17.2 times estimated
earnings, a discount to the multiple of 24.2 for the benchmark.
“The valuations of the company are typical of growth stocks and the
company deserves a premium since there are not many companies in this
region with this kind of growth,” Valecha said.
Finablr’s Drop
Meanwhile, Finablr shares are
down 16% since they began trading in London on May 15. The company
priced its IPO at 175 pence a share, compared with an original offer
range of 210 pence to 260 pence. Shetty set up the firm last year to
consolidate his financial services brands and the company handled more
than 150 million transactions in 2018, according to its website.
Muted investor appetite can partly be attributed to its listing coming
after two other payments companies, Nexi SpA and Network International
Holdings Plc, which both went public in April.
Some good news for Shetty arrived Tuesday as Finablr shares rose as much
as 6.1% in early trading after Goldman Sachs Group Inc. began coverage
of the stock with a buy rating and JPMorgan Chase & Co. initiated with an overweight recommendation. Both firms were underwriters of the IPO.
“For investors to be interested in the stock, you need greater
diversification of product and you need to see accelerating growth, and
that’s difficult to see where that comes from at the moment,’’ said Neil
Campling, an analyst at Mirabaud Securities Ltd. in London.
Finablr has “pretty slow growth” overall, especially compared to some
other fintech companies, according to Campling. The company, which also
owns currency exchange chain Travelex, is facing rising competition from
firms such as London-based startup Revolut Ltd., he said.
Finablr’s sales rose 6.6% last year, while Dutch payment company Adyen
NV, which has almost tripled since its 2018 IPO, posted growth of 63%.
Finablr declined to comment.
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