Nearmap (ASX: NEA) defends a short-selling attack

Last week, Beijing based short-selling activist firm J Capital launched a scathing report on Australian aerial imagery technology firm (and small cap darling) Nearmap (ASX: NEA), in the hope that it would trigger a sell-off so that it could profit handsomely from short positions in the company.

The report titled “Afraid to Admit Failure” attacked Nearmap’s US business by accusing the company of attempting to hide poor performance in a crucial market. The report says “Nearmap is apparently trying to hide its US failure with accounting tricks to pull-forward revenue. Without that seemingly aggressive revenue recognition, we believe revenue growth in the US was less than half what was reported.”

In 2018, US activist hedge fund Glaucus Research Group took aim at Blue Sky Alternative Investments and rocked markets after releasing a report claiming the company was over-stating its assets. This triggered a short-selling collapse which, 14 months later, ultimately sent the company into receivership following an Australian Securities & Investments Commission (ASIC) investigation. This year, US stock GameStop was targeted by shorters in a similar fashion, but managed to fight it off thanks to the US Reddit group, WallStreetBets. The group created a buying frenzy aimed at catching out the Wall Street hedge fund shorters. The move sent GameStop’s price up 1500 per cent after triggering a short-covering squeeze, defending the company against the short-selling attack.

In the case of Nearmap, the company was under short-seller attack and J Capital’s report had the potential to cause significant share price pain. Yet, it would seem that ASX investors may be more grown-up than our international counterparts, willing to hold tight and wait for management’s reply rather than sell on the basis of a little-known researcher posting a negative report.

Nearmap’s CEO Rob Newman delivered a concise and clear rebuttal of J Capital’s report, labelling the claims as inaccurate and misleading. To further support the rebuttal, NEA also brought forward the release of its first-half result which smashed expectations for revenue and earnings. A 41 per cent increase in annual cash sales of its North American business was proof that the business was growing, dismissing J Capital’s claims.

Citi and RBC have a $3 price target and are advising clients to buy shares at these levels. The short-seller’s arguments did not sway either analyst. Shares in NEA rose 19 per cent on the back of the rebuttal and earnings update.

A summary of the results are as follows:

• Annual contract value $112.2m ($116.7m↑ 21 per cent at constant currency)
• Statutory revenue $54.7m ↑ 18 per cent
• Sales team contribution ratio 86 per cent↑ from 44 per cent
• Subscription retention 93.9 per cent ↑ from 88.5 per cent
• Cash at bank $129.3m ↑ from $33.8m3 (30 June 2020)
• Gross margin 77 per cent ↑ from 68 per cent

While there is merit to short-selling, the ‘short and distort’ (opposite of pump and dump) type of short-seller tends to use misinformation to drive a share price lower. This type of shorting is sometimes considered unscrupulous and, in the end, investors are left holding the bag. Fortunately, the market tends to be good at seeing true value.

Ishan Dan

Ishan is an experienced journalist covering The Inside Investor and The Insider Adviser publications.