Three small caps taking on the big guns in 2014

iCar, iProperty and Somnomed could be the next big thing!

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In February and August each year, the majority of ASX-listed companies release their financial and operational results for the past six or 12 months. This February has been no different, but unlike previous years, Australian listed companies are expected to deliver earnings growth of around 15% this financial year. The vast majority of the growth will come from Australia’s largest companies, including the big miners, banks and telecommunications companies; however two obvious trends observed this February have been the contribution of companies who conduct business online, and the continued strength of companies in the medical and healthcare sectors.

Standout results from larger names included a 10% increase in revenue, a 17% increase in profit and a 16% jump in the interim dividend from Limited (ASX: CRZ), a 30% increase in revenue, and a 37% increase in profit and interim dividend from REA Group Limited (ASX: REA), while more subdued but solid growth was achieved by sleep apnea group Resmed Inc (ASX: RMD).

These three companies hold commanding positions in Australia, so much so that their competition has been largely stifled from making any reasonable inroads into their dominant market share for years. But Australia’s population is relatively small and more and more companies are realising that the future is in Asia; witness the market reaction to SEEK Limited’s (ASX: SEK) purchase of Asian job marketplace business JobStreet earlier this month.

Carsales, REA Group and ResMed all have a presence in Asia, however on the current eyewatering price-to-earnings ratio of the first two in particular, how can investors get exposure to these business models in Asia?

The answer? Small Caps!

There are three companies, already established in Asia, which will be taking on Australia’s big names in Asia – and they’re all listed on the ASX.

First up is iCar Asia Ltd (ASX: ICQ). iCar is currently in the process of monetising its service, having operated a free-listing model up until the start of the year. Its addressable market in Asia is approximately 10 times that of in Australia and it had more than double the amount of car listings online as of early February. Barring any serious missteps by management, this company looks like it could go a long way.

Similarly, iProperty Group Ltd (ASX: IPP) is aiming to become the REA Group of Asia. It currently operates in Malaysia, Hong Kong, Indonesia, Singapore, Philippines, India and Macau but is yet to turn a profit. Meanwhile, coverage of the stock is increasing and it is up 50% already in 2014. Internet penetration in Asia is steadily increasing, which should help the company grow in the coming years.

Finally, Somnomed Limited (ASX: SOM) develops sleep apnea treatments, similar to Resmed, and has exposure to Europe, North America, and the Asia Pacific, including Japan, Singapore, Malaysia and South Korea. In the most recent half the company managed to grow revenue 39% by increasing sales volumes by 19%, however investment in its US operations resulted in a drop in earnings. It currently has a price-to-earnings ratio of 117; however this could drop quickly in coming years as it establishes a larger distribution base.

Foolish takeaway

Despite their outrageously high price-to-earnings multiples, the three small caps above may well have extremely bright futures. While investors buying now have missed out on massive percentage gains, there could be many more to come if they can successfully execute their growth strategies.

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Motley Fool contributor Andrew Mudie does not own shares in any companies mentioned

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