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).
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.
The ASX small cap share recently held its annual general meeting (AGM) and gave a market update in early November which included FY21 earnings before interest, tax, depreciation and amortisation (EBITDA) guidance of $9.8 million to $10.2 million. This would be an increase of 21% to 26% compared to the prior corresponding period. Occupancy has remained above 95% and the business continues to sell non-core assets, which will provide the funding for organic growth and acquisition opportunities.
The fund manager believes Eureka has multiple levers that can be pulled to help earnings growth at a significant rate going forward, and when overlaid with the current industry tailwinds, Naos thinks Eureka will be highly attractive to investors, particularly in this low interest environment.
COG Financial Services Ltd (ASX: COG)
The financing business also held its AGM and gave an update about its strategy going forward. It's still focused on its broking and aggregation business, particularly the insurance broking, as COG brokers have a close relationship with clients and have the ability to meet their financing needs.
The ASX small cap share also provided disclosure about the software that allows COG brokers to have real time data on their entire client base together with real-time quoting and application functionality. Naos believes this is key for COG as some of the brokers it owns may have 10,000 active SME clients that will have a number of financing and insurance needs in any given year.
Naos also thinks that a merger with Earlypay Ltd (ASX: EPY) – formerly CML Group – would also be beneficial if done at the right time.
Big River Industries Ltd (ASX: BRI)
This is a business that's a diversified manufacturer and distributor of timber and building products. It sells softwood and hardwood formply and structural plywood products, consumable formwork products and it's a national merchant of timber and associated building products to local trade, medium sized and enterprise sized companies.
Naos pointed out that Big River Industries was recently successful in applying for a $10 million grant for recovering from the bushfires. The grant will allow the ASX small cap share to close the manufacturing facility in Wagga Wagga and move this capability into the newer facility in Grafton.
The fund manager likes this because it will reduce the exposure to more commodity-type manufactured goods and allow the company to continue to focus on the distribution model with a focus on higher value products. The closure in the site could lead to a significant reduction in working capital and potential upside from land sale proceeds.
