The small cap world is full of undiscovered businesses that could become the next blue chip or mid-cap.
Small businesses have more growth potential simply due to their size, they can grow many times before size becomes a limiting factor. They also usually trade on a lower valuation because they aren’t followed by many analysts or fund managers.
I particularly like finding small caps that could fit into every portfolio. I like to find shares that are growing at a decent rate, that are nicely valued and have an attractive dividend yield.
Here are two small caps that I’m excited by:
Apiam Animal Health Ltd (ASX: AHX)
Apiam is one of the largest veterinary businesses in Australia. However, it is quite different to its listed peers in that it’s based in regional areas and derives a significant part of earnings from attending to livestock.
Livestock prices can act like commodity prices – unreliable, with little price control. However, Apiam could be a good way to get indirect exposure to Australia’s growing food export economy without the volatility.
It grew revenue by 8.8% and gross profit by 9.1% in FY18. Earnings before interest, tax, depreciation and amortisation (EBITDA) increased by 10.7%. Apiam is improving its profit margins, a good sign for a growing business.
However, it is also heavily investing for future growth, which is why the bottom line wasn’t so good. But, the investments should be long-term boosts for revenue growth and efficiencies.
I am also attracted to the co-location strategy of putting Apiam vets inside Petstock stores and the continuing acquisitions adds to its scale too.
Apiam is trading at around 10x FY19’s estimated earnings with a grossed-up dividend yield of 4.1%.
Paragon Care Ltd (ASX: PGC)
Paragon is my favourite small cap idea with Zenitas Healthcare Limited (ASX: ZNT) now being taken over. Paragon is a supplier of healthcare items like beds and devices for clients such as hospitals and aged care facilities.
I like that Paragon is a general diversified play on the whole healthcare sector. It generates a large amount of its revenue from public healthcare facilities, so it isn’t at risk as much compared to private hospital operators due to private health insurance affordability.
Paragon has a single purchasing platform for clients to utilise, which should mean improved margins and efficiencies over time. It is steadily acquiring more healthcare distribution businesses so it can sell more products to that same client and win new clients.
The amount of recent corporate activity makes it hard to get a feel for the currently value of the business, particularly on a per-share basis.
However, it seems attractive trading at under 11x FY19’s estimated earnings with a grossed-up dividend yield of 6.4%. Management are targeting organic growth of 10% this year.
Both of them seem like attractive opportunities. If Paragon can achieve organic growth of around 10% this year then today’s share price could be very good value considering the long-term tailwinds it would appear to have.
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Motley Fool contributor Tristan Harrison owns shares of Apiam Animal Health Ltd and Paragon Care Limited. The Motley Fool Australia has recommended Paragon Care Limited and Zenitas Healthcare Ltd. 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 Scott Phillips.