Investing in the small side of the share market carries more risk than other areas. However, if your risk tolerance allows for it, small caps could be a good thing for a balanced portfolio given the potential returns on offer.
With that in mind, here are two small cap ASX shares that could be worth watching closely:
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Elmo Software Ltd (ASX: ELO)
The first small cap to watch is ELMO. It is a cloud-based human resources and payroll software company that provides a unified platform to streamline processes. This includes processes such as employee administration, recruitment, on-boarding, learning, performance, remuneration, compliance training and payroll.
Elmo has been a strong performer in recent years and continued this trend during the first half of FY 2022. For the six months ended 31 December, Elmo grew its annualised recurring revenue (ARR) by 35% since the end of June to $98.3 million. Management advised that this reflects strong trading conditions due to the increased adoption of cloud-software solutions by businesses to manage remote or hybrid workforces.
This result went down well with the team at Morgan Stanley. In response, the broker put an overweight rating and $7.80 price target on its shares.
Serko Ltd (ASX: SKO)
Another small cap to watch is Serko. It is an online travel booking and expense management provider behind the Zeno Travel and Zeno Expense platforms.
Serko's Zeno Travel platform provides AI-powered end-to-end travel itineraries, cost control, and travel policy compliance to corporate customers. Whereas Zeno Expense allows businesses to automate and streamline their expense administration function, identify out-of-policy expense claims, and prevent fraud.
Thanks to travel markets rebounding strongly from COVID and a major deal with travel giant Booking.com commencing last year, Serko reported an 81% jump in operating revenue to NZ$9.2 million during the first half of FY 2022.
The team at Ord Minnett appear to believe this strong form can continue long into the future. Last month the broker put a buy rating and $7.93 price target on Serko's shares.
