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3 top small cap ASX shares to buy

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There are some top small cap ASX shares out there to consider for an investment portfolio.

A smaller business may have more growth potential because it’s earlier on in its growth journey.

Here are three small cap ASX share ideas:

Over The Wire Holdings Ltd (ASX: OTW)

According to the ASX, Over The Wire has a market capitalisation of approximately $250 million.

Fund manager NAOS Small Cap Opportunities Company Ltd (ASX: NSC) is a fan of this business. It has various segments including a national voice network, public cloud, cyber security services and on-demand cloud connectivity. The company also recently acquired Digital Sense, which mostly provides services to large and government clients. Over 90% of Digital Sense’s revenue is recurring in nature.

The fund manager’s thinking with Over The Wire is that it will be able to demonstrate to potential clients that it has a wide array of services and help businesses that have complex needs.

Over The Wire has made two acquisitions recently which, together, could increase the earnings before interest, tax, depreciation and amortisation (EBITDA) by $14 million over the next two years.

Naos thinks that the small cap ASX share could have a normalised EBITDA run-rate of more than $35 million in FY22 which could mean significant free cash flow generation and could see Over The Wire command a premium EBITDA multiple.

According to Commsec, at the current Over The Wire share price it’s valued at 17x FY23’s estimated earnings.

City Chic Collective Ltd (ASX: CCX)

According to the ASX, City Chic has a market capitalisation of $911 million.

City Chic is a global omni-channel retailer that specialises in plus-size women’s apparel, footwear and accessories. It has a number of brands including City Chic, Avenue, CCX, Hips & Curves and Fox & Royal. It has a network of 96 stores across Australia and New Zealand, websites operating in Australia, New Zealand and the US, marketplace and wholesale partnerships with major US retailers such as Macys and Nordstrom, and a wholesale business with European and UK partners such as ASOS and Zalando.

Fund manager Chris Prunty from QVG Capital thinks that the e-commerce theme will continue to grow after COVID-19 has passed. For a business like City Chic, the fashion ASX share’s ability to sell products online underlines its ability to build a market-leading position for itself.

The small cap ASX share recently announced an acquisition. It’s going to buy UK-based plus-size brand Evans from Arcadia Group. Evans’ e-commerce and wholesale businesses generated £26 million (A$46 million) of sales for the financial year to August 2020. However, the acquisition doesn’t include the physical store network.

Management are excited by the opportunity to directly expand into the UK market which may have a total addressable market of $9 billion.

At the current City Chic share price, it’s valued at 27x FY23’s estimated earnings according to Commsec.

Nick Scali Limited (ASX: NCK)

Nick Scali has a market capitalisation of $772 million according to the ASX.

Fund Manager Matt Williams from Airlie Funds thinks Nick Scali is going to benefit from a lower unemployment rate and consumers could continue to benefit from the government stimulus.

A couple of months ago the small cap ASX share released a trading update which said that its total sales orders for the first three months of FY21 were up 45% on the previous year and this trend continued through October. Excluding store closures in Melbourne and Auckland, comparable store sales orders went up 59% in the first quarter.

Online orders were also up 47% in the first quarter of FY21 and it expects the earnings before interest and tax (EBIT) contribution from online to be higher in FY21 than previously expected.

Nick Scali is now expecting net profit after tax in the first half of FY21 to grow by 70% to 80%.

Where to invest $1,000 right now

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Tristan Harrison owns shares of NAO SMLCAP FPO. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Over The Wire Holdings Ltd. The Motley Fool Australia has recommended Over The Wire Holdings Ltd. 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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