Muddy Waters – OSI Systems: Lost Credibility

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Muddy Waters with an update on OSI Systems, Inc. (NASDAQ:OSIS)

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OSIS’s response to our December 6, 2017 report in no way changes our opinion that OSIS is rotten to the core. We see the Albania issue as important for three reasons – first, it’s illustrative of our view of the rot; second, it begs the question of how viable the turnkey model is without corruption, particularly in jurisdictions where corruption is a major issue; and third, OSIS’s response goes to what we see is a complete lack of management credibility.

In this update, we address OSIS’s response to Albania. OSIS’s “partnership” with ICMS, a company purportedly “with civil works construction capabilities in Albania”, appears to us a conduit for corruption for five additional reasons.

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  • First, OSIS’s statement that “…ICMS made significant capital investments toward the implementation of the program in a value well beyond the par value of shares” is greatly misleading because it appears from the various entities’ financials that OSIS has provided virtually all funding to, and investment in, S2 Albania.
  • Second, OSIS appears to have sought to conceal its joint venture with ICMS from its investors, which we see no reason to do if this arrangement were legitimate.
  • Third, even if ICMS were the greatest construction company in the world, how would it be entitled to half of the economics of the concession for pouring concrete when OSIS is providing the key equipment, technology, knowhow, and financing?
  • Fourth, we are fairly certain that ICMS is not the greatest construction company in the world – or even in Albania. ICMS’s construction affiliate was formed only eight months before OSIS was awarded the concession – its capitalization was only ~US$850, and it was then sold to ICMS’s physician shareholder also for ~US$850. Moreover, it has virtually no tangible assets. If it’s really this easy and cheap to get a nine-figure construction contract, then we at Muddy Waters are wondering why we’re in the relatively impoverished world of hedge funds.
  • Fifth, the timeline of this “partnership” is beyond suspicious – with the requisite approval of the transfer of shares taking place on the day the outgoing Minister of Finance left and the new one was seated.

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