Emma Wall: Hello and welcome to Morningstar. I'm Emma Wall and I'm joined today by Ian Ormiston, Manager of the Old Mutual Europe (Ex-UK) Smaller Companies Fund, to give his three stock picks.
Hello, Ian.
Ian Ormiston: Hi.
Wall: So, what's the first stock today?
Ormiston: First one is Vapiano (VAO), which is a German-run Italian restaurant chain. It's plugging into a new demographic, which is, fast casual dining. Very high-growth group; really going to be a very high-return, we can see it from the mature stores they've got. What we like about it is that there's plenty of distance.
It's a global group. So, even though it's a smaller company, €500 million market cap, there's plenty of places it can still grow and as well as the top-line growth will see a maturity profile coming through which will deliver great margin growth, so the growth end of our investment spectrum.
Wall: And what are its competitors in this space, because I know not everyone is based in London, but in London there are certainly quite a few of this style of restaurants? Is it a shift, a permanent shift into the change in the way that we're going to eat or do the competitors in this prove a challenge?
Ormiston: Well, I think, if we think about the one, the kind of fashionable now, the Shake Shacks, the Five Guys, they've not been around that long and so we could feel worry that this is a sort of fashion thing. If we think about some of the older ones, which probably have faded on our memory a bit, things like Wagamamas which are now a fairly big British concept across the country, but also actually starting to expand in the U.S.
There is definitely a shift, which is, turn up without a booking, spend less time, feel more relaxed. And it also fits with the delivery model where a lot of people who actually eat in these places also want food delivered. And so, they are actually plugging in with a separate kitchen, a separate entrance for the delivery part which again is very, very profitable. You charge the same price, but people don't come and sit in your real estate which is great.
Wall: And what's the second stock today?
Ormiston: Second one is Aurelius (AR4). It's almost at the opposite end of the spectrum. This is a value business. It's a private equity business effectively. They turn around businesses. We really like them because they pay very, very low prices for the businesses that they take over, troubled businesses that have been undermanaged. The most recent business they bought is Office Depot Europe, the biggest business they've ever bought.
A business that was losing money in one half of it, making money in another and how do they actually deliver returns to us. They fix the broken part and within two or three years they will sell those businesses on to other owners. So, they solve kind of problem children for people. The reason it's been of real interest to us in the last few months is they were attacked by a short seller called Gotham Research.
We had to spend a lot of time, both on our own but with the management, discussing some of the issues that were raised there, getting comfortable that those issues were actually fairly spurious and actually add into our position which has actually added to our returns.
Wall: And what's the third and final stock?
Ormiston: Third one is Leoni (LEO), which is an industrial business. We should always think about industrials when we think about Europe. They make the wiring systems that go into pretty much all the autos across Europe. They are the leading producer of wiring systems. Again, the reason it's been an opportunity for us is, people are worrying about auto demand in the U.S. It's not very exposed to the U.S. Some of the problems that they have had in terms of their production in the past. Again, we think those have been fixed. But again, it's about the time horizon of investment.
We see real opportunities for this company as cars become more electrified and there's more electric systems within there. So, actually, not all auto components suppliers are the same and some will have real great opportunities in the next few years.
Wall: You've mentioned electric cars there. Autos have been in the news a lot recently because there has been this target to be fully autoed by 2050. Is that a challenge or is that an opportunity for a company like Leoni?
Ormiston: For them you need them to have good relationship with the OEMs. If they were just a pure components supplier, then you could worry about them. But because these systems are so integral and they are working with all the OEMs, the OEMs are under a lot of pressure, Tesla reported Model 3 and they've given very good strong guidance that they would be quite profitable in Model 3 very quickly. It will give a good kicker to principally the Germans but actually also the French OEMs to really push on with their electric projects. Somebody that's in the center of electrification should really be a beneficiary of that.
Wall: Ian, thank you very much.
Ormiston: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
