26 February 2018

Small cap picks: Why Lizard's Jon Moog likes Daikokutenbussan, Wizz Air, Hugel (AFR)

(Vesna Poljak)

Lizard Investors, the Chicago-based global small caps house, has done well out of anticipating trends in retail.

It was early on Boohoo.com, the UK online fashion business well-known to Millennials and reality television stars.

BIM, the Turkish discount grocer, was Lizard founder Leah Zell's top long idea at the inaugural Australian Sohn Hearts and Minds conference in 2016. It came on Lizard's radar for its 46 per cent return on capital and its links to one of the founders of Aldi, who was a consultant to BIM.
Today it is optimistic about another grocery name, Japan's Daikokutenbussan Co, which it has held – patiently – since 2012.

Jonathan Moog, who is the co-portfolio manager of the strategy, says this fits in with Lizard's inclination to invest "off the beaten path".

"We want companies that have large barriers to entry, [and] are going to create value for long periods of time," he says – as long as they are trading at a significant discount to what they are really worth.

Daikokutenbussan

Daikokutenbussan doubled in value in 2016, for reasons not entirely clear.

"They sell food at probably a 20 to 30 per cent discount to the traditional grocery store. We like that business model a lot. They continue to grow stores, they've had a very good return on capital over time and I don't know why it took a while for the stockmarket to 'catch-up' with what we thought was the quality of the business. But in our market space, it happens often."

Once Lizard figured out the benefits of the private Aldi model, it kept finding ways to invest in its imitators. "Very few people know how good a business Aldi really is."

A consulting group in Germany, The Institute for Simplicity (Institut für Einfachheit), was the advisor hired by BIM. And six of seven food retail start-ups the institute has been linked to have been successful, Moog notes, (although Daikokutenbussan was not one of them).

Boohoo "was a absolutely phenomenal investment for us over the last 24 months," he says. It's a smaller percentage of the portfolio today in light of its 264 per cent and 40 per cent annual share price performance over 2016 and 2017. Even so, Moog says Boohoo remains true to its premise of "a small business that has established an advantage over a much larger competitor and will continue to take share for a very long period of time", in this case at the expense of H&M.

Wizz Air

Lizard doesn't own any stocks in Australia right now, and has not since it exited Corporate Express via the Staples buy-out of 2010. But Moog keeps an eye on the domestic market, which he broadly regards as being expensive on the surface.

In 2016, Lizard was quietly bearish view on Woolworths because of its misallocation of capital. Moog was born in Columbia to American parents and moved to Buffalo, New York when he was eight years old. He claims to be only an average skier but was a decent tennis player in college
(Providence College, Rhode Island) who recently converted to a one-handed backhand.

"I got bored a couple of years ago and switched to a one-hander," he says. "You can be a little lazier with your footwork with the one-hander."
His first job was in equity research at Loomis, Sayles & Co where he covered the retail, media, restaurants and industrials sectors.

Another stock he is bullish on is Wizz Air Holdings, the low-cost carrier listed in London. Wizz has become the number one discount airline in Central and Eastern Europe by opening up routes that nobody services.
"Wizz is kind of [Ryanair's] little cousin in Eastern Europe. It was founded by a Hungarian, headquartered in Switzerland but really based in Poland. What we love about that business is they've established a very dominant position in Eastern Europe, the company was out of favour due to some issues surrounding Brexit but had tremendous potential to grow over a long period of time as people in Eastern Europe continue to fly more and more, and had a cost advantage over every competitor we could find."

In 2017-17, Wizz grew passengers by 18.9 per cent and added 113 routes. It has guided for capacity growth of 23 per cent this year.

Hugel

Then there is Hugel, Lizard's biggest current portfolio position, a South Korean maker of a Botox equivalent. There are three manufacturers alone of the formula in South Korea, the world's most advanced market for beauty and cosmetic services. The fund manager hopes Hugel can take its plant-based version and challenge for market share in bigger regions.

"You had a management team and a founder who owned a very significant share, he got into a fight with a few of his financial co-founders. During that time there was a price war in South Korea and the founder sold all of his shares to Bain Capital," Moog explains.

This messy origin story was concealing a high-growth, quality business with 80 per cent earnings before interest and tax margins. The shelf price of Hugel's filler is about half of what global leader Allergan's Botox sells for. "They're able to sell it at half the price and still get that margin level, that's what gets us really excited," Moog says.

Lizard's strategy, distributed in Australia via Pengana, returned 24.9 per cent after fees in the year ending January versus 17.8 per cent for its benchmark, the MSCI All Country World SMID Cap Index unhedged in Australian dollar terms. 

The fund manager is cautious towards yield stocks, but welcomes the market volatility this year. It is holding around 19 per cent cash and can hold up to 20 per cent.

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