The blackout period is over and Lev Mizikovsky is back in the market for ANO shares. How deep are his pockets and what’s his end game?
Advance Nanotek (ANO.AX) may have found a floor two weeks ago when a 50k share bid was filled at A$3.30 and quickly replaced with another 100k share bid at the same price. The size of the purchase and level of conviction must have given would-be sellers pause for thought as the stock bounced sharply higher over the next two trading days. Unsurprisingly, the buyer was once again Chairman Lev Mizikovsky, confirmed in a filing last week. The stock has settled down a bit, but the 100k bid remains. Of all the companies I track, no manager is buying their own stock as aggressively as Lev is buying ANO, so I think it’s worth expanding on what’s happening here.
Lev was born in the Soviet Union, which was not exactly the best place for him to exercise his natural talent in capital allocation. He left the USSR for Australia as a teenager after running into trouble with the authorities for swiping imported swimming trunks left out to dry at the local beach and flipping them at a nearby market (allegedly). As a Russian friend has pointed out to me, this is not as actually as bad as it sounds when you consider the fact that purchasing the expensive imported swimming trunks in the first place was also technically illegal in Soviet Russia.
Australia proved to be greener pastures for Lev, who found his first taste of success in the contract homebuilding business. Lev founded Tamawood (TWD.AX) in 1989 and listed it on the ASX in 2000. As a contract builder, Tamawood does not need to hold any land bank; Lev has focused on running an asset-light model, prioritizing returns on invested capital and returns of capital to shareholders over expensive empire building.
Over the past twenty years, this strategy has enabled Tamawood shareholders to trounce the market averages, but the stock price chart only tells a fraction of the story. Tamawood has also distributed a cumulative A$3.50 per share of cash dividends, as well as shares in listed companies Astivita (AIR.AX) and Senterprisys (SPS.NSX). Investors who bought and held on from the first day of trading would have made 7.5x+ their investment from dividends alone.
Lev owned about 80% of the shares outstanding when Tamawood was first listed, and his stake now stands at about 53%. Assuming his average stake was about 60% over the past 20 years, the cumulative dividend proceeds he has collected amount to about A$60 million. I’m going to stick with this very rough estimate and not give any credit to past share sales, as I think this time period may include several marriages, the financial details of which are impossible for me to know for certain.
Lev used some of these proceeds to diversify into several ASX-listed companies, but ANO became his main focus as he gained control of the Company through open-market purchases, successfully turned the business into a growth machine, and the value of his investment ballooned to become the majority of his net worth. However, the actual capital outlay needed to make this controlling investment was just a small fraction of Lev’s assets outside of Tamawood, as the bulk of his buying occurred between 2010 and 2017, when the Company’s market capitalization was under A$20 million:
| Year | Lev’s ANO Holding |
| 2008 | 7% |
| 2009 | 7% |
| 2010 | 9% |
| 2011 | 27% |
| 2012 | 27% |
| 2013 | 30% |
| 2014 | 36% |
| 2015 | 37% |
| 2016 | 40% |
| 2017 | 43% |
| 2018 | 43% |
| 2019 | 46% |
| 2020 | 47% |
Lev has increased his stake in ANO through on-market purchases, block purchases from exiting strategic shareholders, and rights offerings. A ~34% stake purchased between 2010 and 2017 would have only cost Lev about A$5 million. Lev has put another A$6m into ANO in 2020, including roughly A$3m through a rights offering at A$5.78 in January, a A$1m+ off-market purchase at A$6.00 negotiated in February, and numerous on-market purchases as the shares declined due to coronavirus-related supply chain disruption.
ANO’s FY2020 annual report gave a snapshot of a company continuing to ramp production through a period of sharply reduced industry demand. While this will bring long-term strategic benefits, it will put a strain on the company’s finances in the short term. ANO will need to hold more inventory and accommodate higher accounts receivable while continuing to pay employees and rent, all while recording zero revenue for several months. Despite record profitability and a cash infusion from the rights offering in January, the growth in working capital and fixed assets left very little cash in the bank, less than $300k.
However, the report also noted that “with the continued support of the major shareholder, short term liquidity requirements will be met while the industry commences recovery,” and “the Company has access to adequate funding to support the ongoing business needs should the recovery take longer than expected.” The Company also enjoys some support from the JobKeeper program, which contributed A$214k to cover payroll expenses in April, May and June, and the program will be extended through March 2021, which will benefit the Company as long as revenues are down year-over-year.
Based on Lev’s stake in Tamawood and his record of public market transactions, I suspect he still has liquid assets outside of his public holdings somewhere in the double-digit millions. His recent actions do not indicate he is personally feeling any kind of liquidity crunch, as he recently opted to participate in Tamawood’s dividend reinvestment plan, rather than collect the A$1.6 million dividend in cash.
Lev is also actively supporting ANO through his financial support of Astivita (AIR). AIR was originally spun out of Tamawood and engaged in the distribution of building materials to contractors. This business struggled following Amazon’s entry into the Australian B2B market, which forced the Company to move its building supply business onto the Amazon platform and prompted the Board (essentially the same people across ANO and AIR) to formulate an alternate strategy of selling white-label consumer goods on Amazon. That strategy has been tweaked to better complement ANO, with an emphasis on white-label sun care products using ANO’s active ingredients and formulas and a line of antiviral products developed around patents jointly owned by ANO and AIR.
Astivita is still generating operating losses, which have accelerated due to a growing number of product launches. Lev owns roughly 70% of the Company and has kept AIR afloat via shareholder loans. In 2019, a A$3.3 million shareholder loan from Lev was converted to equity, and the Company held an additional A$3 million shareholder loan on the books as of the end of FY2020. According to the AIR annual report released earlier this week, Lev’s investment may soon pay off. The Company turned a profit in the month of July due to a solid performance from AstiVita Mineral Sunscreen, which was launched on Amazon in the U.S. in April 2020 and cracked the top 50 bestselling facial sunscreen list, a very competitive category. Astivita will launch 8 brands and up to 100 new products within the next 12-18 months. While Lev likely intends to make Astivita profitable in the long run (especially as there are deferred tax assets off the balance sheet), the main priority for him is to create another sales channel for ANO’s Zinclear (which is highly profitable now). Astivita’s aggressive pricing strategy has driven high enough volumes to catch the industry’s attention, which should lead to more business from sun care brands looking for a turnkey solution (formula, manufacturing, bottling, labeling, etc.).
Some investors have voiced concerns to me about the risk of Lev’s acquisitive behavior one day leading to a takeover attempt on the cheap. After all, he did once make a habit of stealing bathing suits while their owners were looking the other way (allegedly). I believe that if he wanted to do this, he would have done it before putting in the hard work for shareholders to turn the business around when the stock was much cheaper. It’s also my understanding that he couldn’t do this now even if he wanted to and had the financing lined up, as he would not be able to get to the 90% ownership required to force the remaining owners to sell, according to the Australian takeover rules. This is because Brian Maurice Kearney, the legend himself, mortgaged everything to his name to accumulate an 11% stake back when the market cap was around A$10m. Brian knows the business and the opportunity inside and out, so any deal would have to fairly take into account the massive growth potential that lies ahead. So far, Lev has been very methodical about his buying so as not to trigger a mandatory offer, keeping purchases under 3% every six months (Australia’s “creep rule“).
I think Lev is buying because he just thinks the stock is cheap and he has very little competition now, while everyone is turning their attention to software stocks. He thought it was attractive at A$6; he probably can’t believe his luck at A$3.30. Looking at demand a few years down the road, the scrutiny on sunscreen chemicals in the U.S. is likely to increase as the CARES Act gave the FDA administrative powers to enforce a new sunscreen rule, which will likely demand more safety data in order to classify the currently approved chemicals as safe and effective (GRASE), and state and local bans draw attention to the chemicals’ environmental impact. The lasting impact of the coronavirus should be fairly positive for ANO, as people are spending more time both outdoors and in front of screens and doing more product research online:
“Increased screen time has turned attention to the impact of artificial blue light on the skin. Searches for blue light skincare have grown by 46.2 percent over the last 12 months, according to Spate, and brands who sell blue light-blocking products say their sales have followed suit. The suncare brand Coola’s four blue light-blocking products have seen week-over-week sales double on Amazon since 1 March, and quadruple on the brand’s site in the same period, according to CEO and founder Chris Birchby. One Ocean Beauty, which sells a hydrating blue light-blocking mist, reports that sales of the product grew by 200 percent over the course of April and May, at three times the monthly average. Supergoop, which sells six blue light-blocking products, has also seen an uptick in sales, two of which — a sheer sunscreen and a makeup primer — are now the top two sellers in facial suncare at Sephora.”
Management has stated several times that they intend to list on the NASDAQ, where a much larger investor base is closer to the story in the North American market that accounts for 70% of ANO sales. This would be a perfect opportunity to bring some institutional shareholders on board to enable more efficient price discovery and make everybody who sticks with Lev rich and happy.
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