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 the small cap ASX shares for the long-term. It considers the performance and the liquidity of its positions whilst ignoring the index. Performance can sometimes be quite variable when compared to the index.
It looks to invest purely in industrial companies whilst also considering the ESG factors (environmental, social and governance).
What are some of the small cap ASX shares that it thinks are opportunities?
In its latest monthly update for 31 October 2020, Naos gave the latest commentary for some of its small cap ASX share positions:
Eureka Group Holdings Ltd (ASX: EGH)
Naos says that Eureka Group is a provider of quality and affordable rental accommodation for independent seniors within a community environment. Eureka owns 30 villages and manages a further nine villages with a total of 2,147 across Queensland, Tasmania, South Australia, Victoria and New South Wales.
Eureka recently completed the acquisition of two affordable rental seniors accommodation villages – one is in Cairns and the other is in Hervey Bay. The acquisition price was a total of $13 million.
Naos believes that, in a world of record low interest rates together with a highly fragmented industry, the asset portfolio that the small cap ASX share owns will command a significantly reduced cap rate and therefore have the capability to increase the net tangible assets (NTA) going forward. Eureka may not need to issue more shares to fund its bolt-on acquisitions as it can continue to sell non-core assets. Naos also thinks there are other ways for Eureka to build scale in what remains a very attractive asset class for certain investors.
MNF Group Ltd (ASX: MNF)
Naos describes MNF as a founder led software company, which specialises in proprietary digital network infrastructure for voice communications.
The fund manager says that MNF provides voice carriage and value-added software services to some of the world's largest software companies and wants to expand into the APAC region.
Naos noted that MNF recently provided FY21 earnings before interest, tax, depreciation and amortisation (EBITDA) guidance of $40 million to $43 million, with the mid-point implying year on year growth of 8.6%. The wholesale business continues to perform well, with volumes remaining elevated and is expected by Naos to remain so during the rest of FY21.
The new Singapore network will launch commercially in March for the small cap ASX share but is not expected to benefit the FY21 earnings profile, though customers are already being brought on board.
However, headwinds continue for its audio-conferencing business and volume has been lost on minutes trading because of the reduction of international roaming.
Naos believes that a significant amount of shareholder value can be realised if the direct and wholesale divisions are split either through a divestment or demerger by the small cap ASX share.
