Nearmap hits back at short seller J Capital, narrows interim loss

The aerial map maker is preparing for more onslaughts from J Capital, as its share price soared by 19 per cent.

Nearmap boss Rob Newman said J Capital showed a deep misunderstanding of its business and the mapping industry.

Nearmap shares soared 19 per cent on Monday, after Beijing-based short seller J Capital’s thesis was “blown out of the water” by strong results from the mapping company’s US business.

Nearmap rejected J Capital’s report as inaccurate and unsubstantiated, pointing to its half-year results showing US growth of 18 per cent year on year. In a rebuke of J Capital’s short attack, investors sent Nearmap’s shares soaring, and short sellers underwater by at least 13 per cent.

Short bets taken after the report was released lost at least 13 per cent and potentially as much as 24 per cent, in what analysts described as a rebuke of scepticism surrounding Nearmap’s US performance. About 5.5 per cent of the company was shorted.

Nearmap was the ASX’s best-performing stock on Monday and closed at $2.57.

J Capital said in a report last week Nearmap had used “accounting tricks” to misrepresent the success of its US business, claims the company’s boss, Rob Newman, said showed a deep misunderstanding of its business and the mapping industry.

“We’ve got such a good business, that to have a short attack seemed odd. And then as we read through the paper, realised that it was on the basis of a complete misunderstanding of how the business works and what we deliver to our customers,” Dr Newman said. “Short selling is part of the industry, it’s accepted practice, but the short attack in this particular case completely missed how well our business is performing.

“To contrast the quality of the report with the actuality of our results, it’s clear that it was opportunistic.”

Dr Newman said that in the face of a spate of recent short ­attacks against ASX-listed companies, the tide of sentiment was turning against short sellers.

He said J Capital’s report was created without prior consultation or discussion with Nearmap and followed a pattern of overseas-domiciled funds making speculative claims in order to generate uncertainty through adverse publicity and directly profit from such claims.

Even after staring down a short-selling attack on Monday, Dr Newman said he expected more offensives from Beijing-based J Capital, after its report last week that sent the aerial map maker’s shares tumbling.

Speaking to The Australian, Dr Newman said he expected a similar pattern of attack as J Capital’s 2019 campaign against WiseTech, which resulted in WiseTech being hit with 14 reports over 14 days.

“It would not be surprising to expect a second salvo. Given the quality of the first salvo, I think they’d want to rethink that,” he said. “The second salvo is usually weaker. We’re expecting something, but I’m not concerned.”

In its interim results on Monday, Nearmap declared “record performance” for its US business. It posted revenue for the half-year to December 31 up 18 per cent year on year at $54.7m, with its North American revenue up 30 per cent at $21.7m.

Nearmap narrowed its net loss for the period to $9.38m, from a loss of $18.6m a year earlier.

It posted annual contract revenue of $112.2m, up 16 per cent year on year, in line with analyst targets.

Customer churn — a key criticism in J Capital’s report — was reported at 6 per cent, below analyst expectations.

Royal Bank of Canada analysts maintained their outperform rating on Nearmap and their $3 price target, recommending their clients buy the stock, while Morgan Stanley posted a price target of $3.10.

Bell Potter analyst Richard Coppleson described Monday’s results as a good “beat” that blew bears’ thesis out of the water.

Dr Newman said in a letter to shareholders: “The group posted record performance in the North American business, providing validation of the market opportunity and the group’s decision to refine its focus in support of core growth verticals. This was achieved while retention rates reverted to industry-leading levels, adoption of newly developed content types and product lines continued to grow, and the group continued to maintain its disciplined approach to cost management.

“The strength of business performance combined with the strength of the group balance sheet means the group is well placed to continue on its growth journey and to accelerate opportunities as they become apparent.”

In its report last week, J Capital said Nearmap was laying off US sales staff and offering discounts “in a panicked attempt to improve margins, kneecapping its efforts to grow”.

“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 could have been half what was reported,” J Capital co-founder Tim Murray said.

The accusations hit Nearmap shares in morning trade on Thursday, sending the stock tumbling 10 per cent to $2.08. It pared some losses to sit at $2.16 by the time trading was halted just 30 minutes after the report was made public.

J Capital has a short position in the stock and will profit from its share price falling. Short sellers borrow stock and then sell it with the intention of buying it back at a lower price and returning it to the lender. The short seller then pockets the difference.

Exasperated CEOs, some of whom have lost millions of dollars, are mounting a campaign for regulators to intervene and better regulate short sellers.

Those in the firing line say Australia is becoming a lucrative new frontier for activist investors, due to a reduced degree of scrutiny, coupled with regulatory and legal loopholes on offer.

Dr Newman said he had had an outpouring of personal support from investors and analysts defending the company against J Capital’s strikes.

“We’ve been very encouraged, and many of the questions from investors were about just how great the business is going,” he said. “The message from investors has been that the business is performing well, we will continue to invest in it, and we expect accelerated growth as a result.”