There are some ASX small cap shares worth buying and owning according to fund manager Naos Asset Management.
What is Naos Asset Management's investment approach?
Naos is led by chief investment officer (CIO) Sebastian Evans. NAOS Small Cap Opportunities Company Ltd (ASX: NSC) is one of the listed investment companies (LIC) operated by Naos.
That particular LIC looks at businesses with market capitalisations between $100 million and $1 billion.
The fund manager has a number of investment focuses. It looks for businesses that are good value with long term growth potential. With its portfolio, Naos believes it's better to have a quality portfolio rather than numerous holdings. That's why it only holds around 10 positions in each fund, with each ASX share representing a high-conviction position.
Naos invests in those ASX shares for the long-term. It considers the performance and the liquidity of its positions whilst ignoring the index. So performance can sometimes be quite variable when compared to the index.
It looks to invest purely in industrial companies whilst considering the ESG factors (environmental, social and governance).
What are some of the ASX small cap shares that it thinks are opportunities?
In its latest monthly update for 30 September 2020, Naos gave the latest commentary for some of its positions.
Over The Wire Holdings Ltd (ASX: OTW)
Naos describes Over The Wire as a founder led, 'B2B' (business to business) provider for IT and telecommunications systems. The ASX small cap share's purpose, according to Naos, is to simplify technology to empower business through service offerings such as a national voice network, public cloud, cyber security services and on-demand cloud connectivity.
Naos explained that Over The Wire recently announced the acquisition of cloud business Digital Sense Hosting, which provides most of its services to enterprise and government clients. The fund manager believes that this is an excellent strategic fit for the business for numerous reasons.
Firstly, the founders of Digital Sense will be taking a significant portion of Over The Wire shares. The business has a revenue profile that is 90% recurring in nature. The offering of Digital Sense will increase Over The Wire's capability in that sector of the market and bring with it a sophisticated client base.
Naos pointed out that the small cap ASX share has now made two significant acquisitions in a short period of time that could potentially increase the earnings before interest, tax, depreciation and amortisation (EBITDA) by $14 million over the next 24 months. The fundie firmly believes that the ASX share has the potential to generate a normalised run-rate of more than $35 million of EBITDA in FY22, which together with significant free cash flow generation, "should" see Over The Wire command a premium EBITDA multiple.
BSA Limited (ASX: BSA)
Naos describes this small cap ASX share as a solutions-focused technical services organisation. BSA assists clients in implementing their physical assets, needs and goals in the areas of building services, infrastructure and telecommunications. Some of BSA's clients include the NBN, Aldi. Foxtel and the Fiona Stanley Hospital.
Although no company specific announcement was released by BSA, the NBN – BSA's largest customer – announced plans to upgrade the existing network by spending up to $4.5 billion over the next two or three years. Naos said the upgrade will focus on providing fibre to homes that are currently on the fibre to the node technology as well as spending around $400 million on upgrading HFC connections.
Naos believes this is a "significant" opportunity for the small cap ASX share to secure further works with the NBN, as the vast majority of all BSA work with the NBN to date has been around the so called 'last mile' between the node and the connection to the home.
The fundie said that if BSA can secure some of this work, it is not inconceivable that it could present an opportunity worth $100 million to $250 million per annum over the next two to three years. Just as importantly, Naos believes the renewal process for the operations and maintain master agreement (OMMA) is underway and an outcome is expected before Christmas. If BSA can secure an extension to this contract as well as new works under the upgrade plan, then there is potentially a period of "significant revenue growth ahead".
