2 exciting small cap ASX shares to buy: experts

DGL Group is one of the exciting ASX small caps to consider.

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Key points

  • The fund manager Wilson Asset Management has revealed 2 small cap ASX shares that it likes
  • Packaging business Pro-Pac Packaging is rated as a buy due to its good valuation
  • DGL Group is liked thanks to the large rise in demand of Adblue and the company's high barriers to entry

The fund manager Wilson Asset Management (WAM) has recently identified two top small cap ASX shares that it owns in its portfolio that could be buy ideas.

WAM operates several listed investment companies (LICs). Some focus on larger companies like WAM Leaders Ltd (ASX: WLE) and WAM Capital Limited (ASX: WAM).

There's also one called WAM Microcap Limited (ASX: WMI) which targets small cap ASX shares with a market capitalisation typically under $300 million at the time of acquisition.

WAM says WAM Microcap targets the most exciting undervalued growth opportunities in the Australian microcap market.

The WAM Microcap portfolio has delivered gross returns (that's before fees, expenses and taxes) of 24.6% per annum since inception in June 2017, which is superior to the S&P/ASX Small Ordinaries Accumulation Index average return of 12%.

These are the two small cap ASX shares that WAM outlined in its most recent monthly update:

Pro-Pac Packaging Limited (ASX: PPG)

The Pro-Pac Packaging share price has been falling in recent months, however WAM still likes the business.

The fund manager attributed the poor performance to pressures from the Omicron COVID variant.

What does Pro-Pac Packaging do? It supplies a wide range of packaging products and services into industries such as primary produce, food and food processing, agriculture, and fast-moving consumer goods.

In the small cap ASX share's December trading update, it noted it was experiencing labour shortages, inflationary pressures, and ongoing global supply chain problems that are impacting the business.

WAM invested in the business because the fund manager was attracted by the valuation and management's plan to reinvigorate revenue growth.

It's expected that the COVID-19 impacts will eventually subside and WAM remains holders of the company within the portfolio based on its attractive valuation.

DGL Group Ltd (ASX: DGL)

One of the small cap ASX shares that featured in the WAM Microcap portfolio as a top 20 position was DGL Group.

This small cap ASX share was described as a founder-led company offering specialty chemical formulation and manufacturing, warehousing and distribution, waste management, and environmental solutions to over 3,100 customers across Australia and New Zealand.

WAM noted that DGL Group recently held its first annual general meeting (AGM) where management confirmed that the business was on track to exceed its earnings expectations that were outlined in the prospectus with its initial public offering (IPO) in May 2021.

After the acquisition of AUSblue in October 2021, DGL Group has seen a surge in demand in the past month for diesel exhaust fluid AdBlue. This fluid reportedly removes nitrous oxides, which helps reduce harmful emissions and should provide a positive tailwind for earnings in the near term.

The fund manager said that it invested in DGL Group due to its strong barriers to entry and its ability to pursue strategic acquisitions that add to earnings, both of which "will underpin its growth profile over the years to come."

Motley Fool contributor Tristan Harrison owns WAM MICRO FPO. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended DGL Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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