2 outstanding small cap shares to add to your portfolio in 2016

Credit: NRMA Motoring and Services

Continuing the theme from yesterday with 3 top shares to own and 3 small caps to be wary of in 2016 is my take on two great small caps to own in 2015.

Each is attractive in their own way, with one exposed to defensive healthcare demand, while another enjoys sterling exposure to some of the growing economies of south-east Asia:

Lifehealthcare Group Ltd (ASX: LHC) is effectively a middleman that links suppliers to customers, selling medical devices made by the former to the latter. The company focusses on high-end medical devices like implants and spinal surgery systems, and grows primarily through acquisition. Buying new businesses allows Lifehealthcare to expand its customer base and its range of products, diversifying its sources of income as well as gaining economies of scale by cutting out costs that might overlap.

The group faces headwinds from a weak Australian dollar – most items are imported from overseas – which could start to squeeze if the company cannot pass on price increases. However, quality is a key consideration in many of these operations and I do not believe Lifehealthcare will have much difficulty passing on costs.

Furthermore, the business has recently been expanding into knee and hip replacement devices as well as those used in cardiac diagnostics and repair, which gives favourable tailwinds through exposure to an obese and ageing population. Although I initially bought Lifehealthcare shares at around $2.20, the company has grown substantially through acquisition since then and I consider around $3 a good price to pay today.

iCar Asia Ltd (ASX: ICQ) is an unprofitable automobile classifieds website similar to Carsales.Com Limited (ASX: CAR), except it operates in Malaysia, Indonesia, and Thailand. Shares have dipped 10% in the past year as investors were put off by a recent capital raising, although in truth the company’s results have been quite reassuring

The company’s final market, Indonesia, commenced monetisation in October, and iCar reported that 20% of the addressable dealer market paid for credits to ‘bump’ (prioritise) their car listings – not bad for the first month of operations.

It seems likely that the remainder of the market will follow along – if the original dealers are found to be getting a leg-up as a result of bumping. Given that iCar has the biggest websites, this seems likely.

In addition to capturing more of the market, there are also significant tailwinds for iCar as the percentage of total vehicle advertising revenue spent on digital (i.e., the size of the market) grows over time, from 4.1% in 2014 to an estimated 14.9% in 2020. iCar has 2.5% of this already, and believes it might hold between 5% and 10% by 2020.

iCar has risks, given that the company is unprofitable, although management believes it has enough cash to see it through to forecast group Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) profitability in the fourth quarter of 2017. With significant tailwinds and growing revenues, iCar looks like an appealing investment option, and I am considering buying more shares at or under $1.

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Motley Fool contributor Sean O'Neill owns shares of Limited, iCarAsia Limited, and LifeHealthcare Group Limited. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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