I think that small cap ASX shares are attractive ideas to invest into.
It's a lot easier for a smaller business to double in size compared to a large business. A company's potential market is limited to a certain size. If it's near the limit of its market share, then future growth will be lower. It's a lot easier for a small business to deliver market-beating returns because it's starting from a small base. However, higher potential rewards do come with higher risks.
But which ASX small cap shares should you buy? I think these three will be market-beating ideas over the next five to ten years:
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Share 1: Bubs Australia Ltd (ASX: BUB)
Bubs is a rapidly-growing infant formula business which specialises in goat milk products.
The Bubs share price has drifted lower by 15.5% since 24 August 2020 to $0.82. Since then it released its FY20 result and also announced a capital raising.
I thought the FY20 result was quite impressive. Full year revenue was up 32% to $62 million, infant formula revenue grew 58% to $30 million. The ASX share showed that Chinese revenue grew 32% to $13 million and export revenue outside of China increased by five-fold. That ex-China export revenue represented 10% of group revenue.
The normalised gross profit margin increased from 21% to 24% and it is going for a locally-produced manufacturing option (with Bubs' ingredients) in China with joint venture partner Beingmate. Part of the capital raising money will be used to buy a stake in the Chinese manufacturing facility.
Bubs has a lot going on, I can understand the market uncertainty. But there are plenty of positives. It's launching new products, including a vitamin and mineral range. It now has a global brand ambassador. It's growing in multiple markets.
I'd be happy to buy a parcel of Bubs shares at the current share price.
Share 2: Citadel Group Ltd (ASX: CGL)
Citadel is an ASX technology share. The company provides important data management software to clients in sectors like education, healthcare and defence.
The Citadel share price has drifted lower by 15% since 24 August 2020. That was despite a solid underlying result in FY20 as it navigated through COVID-19 and acquired the UK healthcare software operator Wellbeing.
That FY20 result showed underlying revenue increased by 29.4% to $128.4 million and underlying earnings before interest, tax, depreciation and amortisation (EBITDA) rising by 25.3%.
I'm excited by the medium-term potential that the Wellbeing acquisition brings for the ASX share. It means Citadel is shifting towards higher margin, recurring revenue. It also means that Citadel can sell its Australian software into the UK, it can sell the UK software into Australia and it can offer the combined package to new clients and markets.
At the current Citadel share price it's trading at under 12x FY23's estimated earnings.
Share 3: BWX Ltd (ASX: BWX)
BWX is a natural beauty business with a number of brands including Sukin (the core brand), online retailer Nourished Life and two US brands called Andalou Naturals and Mineral Fusion.
FY20 was a strong year despite COVID-19 impacts. BWX has really bounced back over the past couple of years. Revenue grew by 25.5% to $187.7 million, gross profit increased by 30.2% to $108.8 million, underlying EBITDA rose 45.3% to $30.9 million and underlying net profit jumped 38.9% to $15.3 million. Reported net profit actually rose faster, it increased by 59.1% to $15.2 million.
For me, two of the most important metrics from the ASX share were the increasing profit margins. The gross profit margin improved by 210 basis points to 58% and the underlying EBITDA margin increased by 230 basis points to 16.5%. I think that shows the pleasing scalability of the business.
Operating cashflow also improved significantly, up from $3.7 million in FY19 to $28 million in FY20.
It's heading in the right direction and I think there is good potential for international growth in the US, Asia and Europe in the coming years.
At the current BWX share price it's trading at 23x FY23's estimated earnings.
Foolish takeaway
I believe that each of these ASX share small caps have great growth potential and they're trading attractively cheap for their medium-term outlooks. At the current prices I think both Bubs and Citadel look particularly compelling.
