Given their assets under management, most funds focus their share market investing on ASX 200 companies.
Sure, some large caps are growing quickly — look no further than popular high conviction stocks like CSL Limited (ASX:CSL) and Reece Limited (ASX:REH) — but it’s smaller companies that have the most pure growth potential.
Of course, the smaller the company, the higher the risk. The ASX is littered with small caps that can tell a good story, but struggle to turn it into dollars and cents.
But if you look hard enough, and turn over enough rocks, you can find some true hidden gems amongst the thousands of small cap stocks. It’s no coincidence that small and microcap funds consistently rank amongst the top performers.
Here are 2 small cap share ideas from top fund managers…
Zenith Energy (ASX:ZEN) builds, owns and operates remote energy power stations for a range of industries including the resources industry, says Naheed Rahman from Flinders Investment Partners on Livewire.
He says Zenith has had a successful track record over the last several years of growing its installed base, and has a substantial pipeline of both brownfield and greenfield opportunities in place.
Owned assets are more profitable, and generation capacity from owned assets has grown from 88MW at IPO to 121 MW in the space of one year, a growth rate of 38 per cent.
In addition to this existing installed base, Zenith Energy’s recently won a very substantial contract with Newmont Mining for 62MW at its Tanami Mine, which is currently under construction and on track to have a full year contribution in FY20.
Just today, the company has executed a contract with Chevron Australia for a nameplate rated 20MW power station at the WA Oil Operations on Barrow Island. The contract will commence in FY19 for a 10 year term.
In response, the Zenith Energy share price has gained 8.5 cents or 7.6 per cent to $1.20, giving the company a market capitalisation of around $88 million.
Mr Rahman says existing capacity plus future contract wins should deliver greater than 50 per cent per annum compound EBITDA growth from FY17 to FY20 for Zenith. He estimated Zenith Energy shares trade on a FY20 forecast P/E of around 8.5 times earnings.
Mr Rahman concludes by saying in his view, Zenith Energy is one of the most attractive small cap opportunities currently available.
Sealink Travel Group (ASX:SLK) is one of Australia’s premier tourism and transport operators, says DMX Capital Partners Limited.
The company is an established diversified business with operations in key tourism markets under the well recognised brands “SeaLink” and “Captain Cook Cruises.”
In May, Sealink received a takeover offer of $4.75 per share for the company, which it rejected, saying it undervalued the company.
DMX said if business conditions were deteriorating and the company was getting difficult to manage, Sealink might have taken up the offer. Given they rejected it at that level, it suggests they see further value.
The fund says the takeover offer is unlikely to be the last, given the quality of the assets.
DMX sees Sealink as a play on the growth of inbound tourism, a sector they believe has strong tailwinds, good long term fundamentals, and brings valuable economic differentiation.
As of today, the Sealink Travel share price is $4.39, valuing the company at around $442 million.