12 ASX small caps this broker likes ahead of February reporting season

The broking house's latest small-cap report provides its expectations for dozens of names, including the following from the $1 billion-plus and $200m - $1 billion market cap ranges.

The ASX small ords is back to its August 2023 level, having rebounded from its -8.5% low of last October. Analysts at broking house E&P believe “the stage is set” for a strong small-cap market in calendar 2024, as outlined in a recent report.

“The mix of interest rate cuts, falling inflation and easier comps are all very supportive for small caps. The expected rekindling of the IPO market from mid-2024 onwards should provide further impetus,” write Julian Mulcahy, Olivier Coulon, Kieran Harris and Nick Weal.

They note that investor money has already been gradually flowing into small caps again, but it has so far chased the larger names. “But as risk appetite increases over the year, the money will start to filter down to smaller size companies, and eventually into micro caps.”

“When the small-cap market starts running, it’s all about growth. At this early stage, it will still be about good quality companies with good balance sheets and positive free cash flow,” say the E&P analysts.

The team has divided its small-cap coverage into two size categories: those with market caps of $1 billion-plus, and those sitting at between $200 million and $1 billion.

Key picks – $1 billion-plus market cap

AUB (ASX: AUB)

• Market cap: $3.31 billion
• Market Index Broker Consensus: STRONG BUY (13 buy, 1 hold, 0 sell)

E&P sees further outperformance for the operator of broking, underwriting and risk management companies across Australia and New Zealand. The analysts single out the Tysers business, a Lloyd’s-owned re-insurance broker, anticipating positive commentary in the upcoming reporting season on the back of its exposure to the Houthi blockade in the Red Sea. This has seen premiums rise “stratospherically,” benefitting Tyers’ marine operation, its largest business unit.

Accent Group (ASX: AX1)

• Market cap: $1.19 billion
• Market Index Broker Consensus: HOLD (6 buy, 6 hold, 2 sell)

The retailer of lifestyle apparel and footwear is tipped by E&P analysts to hit the bottom of its earnings cycle this year. “In the medium to longer term, we are confident it can grow the store base, driven by a growing footwear market (immigration and penetration-shoes per person driving this),” the analysts write.

They point to the strength of Accent’s key distributed brands HOKA and Skechers in continuing to “grow and deliver outsized earnings for the group, bolstering in-store sales as well as contributing to store rollout.”

Credit Corp Group (ASX: CCP)

• Market cap: $1.17 billion
• Market Index Broker Consensus: STRONG BUY (8 buy, 3 hold, 0 sell)

The consumer finance company reported an earnings downgrade driven by a large impairment in October but has since rebounded. “We think there is scope for the shares to re-rate further, given we believe the key consumer finance business in Australia is enjoying better conditions than widely understood and the collection environment in the US has stabilised,” say the E&P analysts.

They note the company’s price-to-NTA is materially lower than its historical range, which adds to E&P’s confidence in the business.

Flight Centre (ASX: FLT)

• Market cap: $4.59 billion
• Market Index Broker Consensus: STRONG BUY (13 buy, 5 hold, 0 sell)

E&P expects healthy profit growth from the travel company in the next two to three years, despite the post-COVID rebound having now ended.

“Flight Centre now has a much better cost structure, with more variable and less fixed costs after it shrunk the shop network (1,500 in FY19 to 549 in FY23) and replaced the time-to-value with online and independents (lower net Rev/TTV margins but lower servicing costs means better profit margins).”

Lovisa (ASX: LOV)

• Market cap: $2.51 billion
• Market Index Broker Consensus: BUY (12 buy, 4 hold, 1 sell)

For the retailer of fast fashion jewellery, E&P expects increased investor focus on Lovisa’s “unparalleled global store rollout story.”

“While the addition of a third major expansion front (China) may seem too much too soon, we are comfortable that management's strong track record and highly disciplined approach to capital allocation more than compensate for the heightened execution risk,” say E&P analysts.

At the smaller end of the spectrum, E&P highlights the following seven companies with market caps of between $200 million and $1 billion.

Catapult (ASX: CAT)

• Market cap: $309.4 million
• Market Index Broker Consensus: STRONG BUY (7 buy, 2 hold, 0 sell

The global sports analytics company has so far signed up several large franchises in some of the world’s elite sports leagues, including European football’s Real Madrid, Bayern Munich and Chelsea.

“It’s taken longer than expected, but the transformation is now complete, with the revenue model now largely SaaS (90%), the cash burn has ended, and having reached scale, incremental revenue is delivering incremental profit,” say the E&P analysts.

Cettire (ASX: CTT)

• Market cap: $1.19 billion
• Market Index Broker Consensus: STRONG BUY (5 buy, 2 hold, 0 sell)

E&P expects “very strong profit growth and free cash flow generation” from the luxury goods retailer in the next three to five years.

The problems at tech retail software company FARFETCH, which recently reported a $1.15 billion debt load, may provide opportunity for Cettire to increase market share and further accelerate its growth, the analysts believe.

DUG Technology (ASX: DUG)

• Market cap: $231.5 million
• Market Index Broker Consensus: STRONG BUY (5 buy, 1 hold, 0 sell)

A software company that primarily serves the energy sector, E&P sees no sign of easing off as it continues to win contracts from oil and gas companies across multiple regions including the Middle East and India.

E&P also see further upside ahead as it signs up companies from outside the energy sector.

Infomedia (ASX: IFM)

• Market cap: $518.59 million
• Market Index Broker Consensus: STRONG BUY (9 buy, 1 hold, 0 sell)

The E&P analysts refer to the software firm’s poor share price performance since the day prior to its FY2023 earnings result – despite its solid earnings since then, having delivered a 25% beat to EBITDA expectations.

“We think Infomedia is making good progress on its key initiatives (automation, offshoring, cross-selling) and expect a solid ARR and Cash EBITDA result at the interim result.”

Ooh!Media (ASX: OML)

• Market cap: $878.78 million
• Market Index Broker Consensus: BUY (6 buy, 5 hold, 0 sell)

“Our positive view is supported by recent growth in the out-of-home market, which has rebounded strongly post the COVID impact in FY20/21,” write the E&P analysts.

They note the rebound continued in the third-quarter 2023, including 14.6% year-on-year growth. “OML also stands to benefit from easier share comps in 4Q23, now lapping the launch of the City of Sydney contract by a competitor in September 2022.”

Peter Warren Automotive (ASX: PWR)

• Market cap: $391 million
• Market Index Broker Consensus: STRONG BUY (11 buy, 1 hold, 0 sell)

E&P points to automotive dealership group’s forward price-to-earnings multiple of 8 times versus its current P/E of 14 to highlight the value it sees.

“Resilient volumes and improved customer retention into the more lucrative backend operations will help offset emerging gross margin pressure,” say the analysts.

“M&A is a key price catalyst, and the balance sheet is strongly positioned to take advantage of accelerating transaction activity across the sector.”

Qualitas (ASX: QAL)

• Market cap: $712.93 million
• Market Index Broker Consensus: STRONG BUY (6 buy, 1 hold, 0 sell)

The property-focused alternative asset manager’s share price remains 2.5% below its IPO price, despite its funds under management now roughly double that of December 2021.

“We think consensus expectations now more appropriately reflect the impact of a senior debt-dominated deployment profile and institutional mandate-dominated committed FUM profile,” say the E&P analysts.

“We expect an interim result showing strong deployment growth and solid NPAT growth despite the drag from reduced base and transaction revenue margins.”

Bring on the 1H results

As we all know, investor behaviour is often far from rational, which means the above views are far from certain. With the first-half 2023-2024 reporting season only just getting started, it remains to be seen whether management teams will deliver in-line with these expectations or not.