I’ve sold my holdings in Churchill China and Paddy Power Betfair in order to make a new investment in NMC Health.

I sold Paddy Power Betfair for a 3% loss. Long term I think PPB looks like a great business. The valuation looks reasonable and the price seems to be bottoming out around the current level, but this is not certain and may take some time. I could have held longer but the main reason for selling was to make way for an alternative with better immediate prospects.

I sold Churchill China for a 10% profit. I’d say that Churchill is a good rather than great business, its main draw being an excellent track record over the last few years. It clearly has some competitive advantage through its brands but I am not sure how strong and sustainable this is. It is currently in an uptrend with good underlying earnings momentum, though some of this is due to currency effects and I feel the valuation is starting to look a little stretched. Similar to Paddy Power Betfair, I could have held on for longer but wanted to release funds for a new holding and further concentrate my portfolio in the process.

With some of the proceeds I’ve topped up On The Beach (to 7.4%), Micro Focus (to 6.1%) and Treatt (to 4.3%). The rest has been used to open a 3.4% position in NMC Health at £20.15.

New holding: NMC Health

NMC Health is a private healthcare provider. It is based primarily in the UAE but has expanded to other countries in the Middle East and some further afield. It provides a somewhat scarily wide array of services, including running multi-speciality hospitals, fertility treatment services, providing long term and home care and the wholesale distribution of medical products and consumables.

NMC made it onto my watchlist fairly recently after appearing on a number of my screens.

Quality

I think NMC is a high quality business:

• Business economics: NMC is a fairly capital intensive business with a lot of tangible assets, such as hospitals. I see this as a bit of a weakness and makes NMC quite different from my ideal type of business. That said, overall I’m fairly satisfied that this is likely to become a very profitable business. The ROCE is reasonable, varying between 10-15% over recent years and apparently declining with the number of large acquisitions and recent investments NMC has made. I think profitability should improve over time as assets mature. NMC has been making good margins of almost 20%. Large capital expenditure has held back cash conversion, though this has been improving and I think is likely to improve further. Overall, I think these figures look just about good enough to invest.
• Track record: NMC is a relatively new listing (2012) and so far has a very consistent record of growth in EPS and more recently free cash flow. The steadily appreciating share price chart reflects this consistent progress.
• Competitive advantage: As  the largest healthcare provider in the UAE, NMC benefits from dealing with relatively price insensitive customers in a relatively undersupplied market. In addition to this, I think NMC has a strong competitive advantage from economies of scale and scope. It benefits from being able to offer a very wide range of different services.
• Growth prospects: the growth prospects look very good. NMC has a growing market share of a growing defensive market with structural under supply in an apparently benign regulatory environment. Its geographic location provides some useful diversification for my portfolio. It also has the opportunity to expand further into other geographies.

Pricing

The recent price momentum has been very good with the price breaking upwards from a long uptrend on increasing volume. The recent catalyst for this has been the withdrawal of copayment requirements for Abu Dhabi national health insurance holders.

The valuation seems reasonable given the current growth trajectory.