Holly Cook: Hello and welcome to the Morningstar series, "3 Stock Picks." Joining me to give us his stock picks is Neil Hermon, manager of the Henderson Smaller Companies Trust (HSL).
Neil, thanks for being here today.
Neil Hermon: Good morning, Holly.
Cook: So, let's just jump straight in. What is the first stock pick that you want to talk about.
Hermon: Just to set the scene actually, in terms of things that we look for in the company to invest in, we're kind of growth investors, we want our companies to have a sound business model, strong management teams, a sensibly structured balance sheet, strong cash flow characteristics and also, strong growth. So, in that context, the first stock I've picked is NMC Health (NMC). NMC Health is an operator of healthcare operations in the Middle East, particularly the UAE. It enjoys some positive dynamics in terms of growth from rising in ageing population, a strong economy and also government underspend in the area overall.
NMC floated in 2012. It’s been a very strong grower since then both through organic and inorganic opportunities. So, it's added capacity in terms of new hospitals but also bought a number of other businesses in the area. Going forward, we think the growth opportunities are very strong, particularly around introduction of mandatory health insurance in Dubai but also from further inorganic opportunities like buying more companies, given its strong balance sheet. So, with 20% growth compounded over the next three years on a reasonable valuation the shares are set well to do well.
Cook: So, obviously, this is listed on the London Stock Exchange, but as you say, it's focused very much in the Middle East. Do you have any concerns around sovereign risks or what would be the sort of any alarm bell that might ring for you?
Hermon: I think, obviously as you said, it's listed in London but operates in UAE. UAE is a pretty stable environment in the Middle East. I suppose my concern would be more about the oil price dependencies of those economies, although they remain very robust currently, and healthcare is a very protected area to spend overall. So, I think frankly around the oil price if it remain low for a very long period of time that may affect the company.
Cook: So, let's move away from healthcare. What's your second stock pick?
Hermon: The second stock pick is Ibstock (IBST), a recently quoted company on the London Stock Exchange. It's a manufacturer of bricks, a leading player in that market with a 40% market share. What attracts us is it's got a strong market position, in a very disciplined market overall. The top three players have a control of 90% of the market and therefore, pricing is very strong. Ibstock has got some strong growth prospects. It's putting capacity down which will come on stream in 2017. That will provide growth by replacing expensive imports which are having about 20% of the current market. Also, it's got a strong management team with a strong balance sheet as well. So, looking forward, with a strong UK housing market, which most bricks go into, we expect this company to do well into the future.
Cook: And I assume there that it is the housing market that would be the potential risk factor here if we see a cyclical change?
Hermon: I think so. There are probably two key risk factors. One is obviously capacity. Ibstock is the only one of the top three players adding capacity currently and therefore, that means the market is very well-controlled. As you said, a housing market downturn will be another concern. Although in the UK we're structurally underbuilding—the number of houses being built is below required. Government policy is very supportive for the housing market overall and also production of houses. So, I think the outlook for the UK housing market from a production perspective is quite positive.
Cook: So, we've had hospitals and bricks. What's third?
Hermon: Third is media. So, my third stock pick is Tarsus (TRS). Tarsus is a B2B exhibitions company. It has leading shows such as Labelexpo, a printing and exhibitions show, and also Dubai Airshow. It's got good diversification globally. It operates in the US, Turkey, China, across Asia and the UK. We like the B2B exhibition space. It's got strong barriers to entry, strong cash flow characteristics, good growth dynamics, particularly as they geo-clone their shows into other areas of the world. The other key feature about Tarsus which attracts us is the M&A potential. This is a consolidating industry. It's a small player in that. Assets are difficult to get hold of. We think over time this is going to be bought by a larger player.
Cook: And what would need to happen for you to have concerns about the stock?
Hermon: I think the concerns over Tarsus would be around global economic conditions. If we saw a downturn in global trade that would affect the exhibition market. The other probably concern would be geopolitical concerns. So, if we saw a political rising thing in Turkey, for example, but its diversification provides some comfort against that.
Cook: Excellent. Neil Hermon, thank you very much for sharing your three stock picks.
Hermon: Thank you.
Cook: For Morningstar, I'm Holly Cook. Thanks for watching.
