The small end of the share market could be a great place to go hunting for opportunities. A fund manager from Wilson Asset Management (WAM) has told investors why ASX small-cap shares could be the place to be.
After seeing the latest reporting season, portfolio manager Tobias Yao and his colleagues think that the broad-based sell-off in small-cap consumer and retail stocks was "overdone"
WAM has a reputation for picking out ASX growth shares where there's a catalyst that the investment team thinks could send the share price higher.
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ASX small-cap shares to stage a turnaround?
Yao suggested high-quality retailers proved they were in a strong position to weather the economic uncertainty and that the short-term dislocation between the share price and the intrinsic value of many of these companies "was a buying opportunity."
The fund manager said WAM sees a lot of value in ASX small-cap shares. The investment team believes the headwinds faced by small businesses over the last few years can turn into tailwinds in the year ahead.
Yao believes many retailers are exhibiting "healthy" balance sheets, holding "very clean" inventory and have begun to "optimise their cost base" in preparation for the uncertain economic conditions.
He noted that there will be some "cyclical economic pressures over the next six to 12 months", but a number of companies are well-positioned to gain market share.
Where are the opportunities?
One of the ASX small-cap shares he pointed to was Reject Shop Ltd (ASX: TRS), which reported a result approximately 10% above expectations and there are catalysts that are "likely to re-rate" the company's share price over the next 12 months.
In FY23, Reject Shop grew sales by 5.8% to $819.3 million, earnings before interest and tax (EBIT) increased 35.7% to $20.8 million and net profit after tax (NPAT) jumped 63.4% to $10.3 million. It also declared a final ordinary dividend per share of 6.5 cents and a special dividend of 9.5 cents per share.
Yao added that the resilience of consumer spending for small-cap retailers was also seen for companies that are in the housing sector.
He revealed that over the last six to nine months, WAM has been "progressively increasing" exposure to the housing sector. Why? Because the fund manager believes the market is being too pessimistic about the impacts of high interest rates, high inflation and the "difficult" economic environment for some of the listed companies.
With that in mind, WAM named two high-conviction ASX small-cap share picks in the housing sector – Maas Group Holdings Ltd (ASX: MGH) and Nick Scali Limited (ASX: NCK). Yao said both of these stock picks delivered strong results, confirming WAM's investment thesis.
Maas describes itself as a construction material, equipment and service provider with exposure across civil, infrastructure, mining and real estate markets. In FY23, it reported that pro forma EBIT rose 27% to $120 million and pro forma NPAT rose 13% to $21.7 million.
Turning to Nick Scali, in FY23 it grew NPAT by 26.1% to $101.1 million and EBIT rose 23.8% to $154.3 million. It was helped by a 250 basis point improvement of the gross profit margin to 63.5%.
