3 small cap ASX shares to buy for 2021

The 3 small cap ASX shares in this article could make big returns in 2021 and beyond. One of those shares is City Chic Collective (ASX:CCX).

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There are some small cap ASX shares that may be able to generate good returns in 2021.

Identifying a business that’s earlier on in its growth journey may mean it’s possible to capture more capital growth.

Here are three smaller businesses with growth potential:

City Chic Collective Ltd (ASX: CCX)

City Chic is a retail ASX share that sells plus-size clothing, footwear and accessories to women.

It adapted to COVID-19 conditions by ramping up its online sales, which grew 113.5% in FY20 and represented 65% of total sales. 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 small cap ASX share’s ability to sell products online underlines its ability to build a market-leading position for itself.

Not only is the company organically growing its presence and sales internationally, but it also recently announced a UK acquisition called Evans, which also sells plus-size clothing. Evans’ e-commerce and wholesale businesses generated £26 million (A$46 million) of sales for the financial year to August 2020. City Chic wants to turn Evans into an online only operator and try to capture a portion of the $9 billion UK market. The small cap ASX share said that Evans has high online penetration with almost half of direct-to-consumer sales (stores and website) being through the digital channel.

According to Commsec numbers, the City Chic share price is valued at 25x FY23’s estimated earnings.

Temple & Webster Group Ltd (ASX: TPW)

Temple & Webster is an e-commerce business that sells furniture and homewares.

Products are directly sent to customers by suppliers which assists with fast delivery and reduces inventory needs. The small cap ASX share also has its own private label range.

Management have previously pointed out the economies of scale benefits that come with the growth. As it gets bigger, it becomes a more important part of suppliers’ business, which secures improved stock security, better terms and exclusive product ranges. Being larger also means that Temple & Webster can invest more in technology, data, marketing and private label products.

In FY20 it grew full year revenue by 74% to $176.3 million. The economies of scale previously mentioned helped grow earnings before interest, tax, depreciation and amortisation (EBITDA) by 483% compared to FY19 to $8.5 million, with the adjusted EBITDA margin growing from 2.5% to 5.3%.

Growth has continued into FY21 with revenue for the period of 1 July 2020 to 19 October 2020 up 138% compared to the prior corresponding period. FY21 first quarter EBITDA generated was $8.6 million, which was more than the whole of FY20.

Using Commsec numbers, the Temple & Webster share price is valued at 35x FY23’s estimated earnings.

Reject Shop Ltd (ASX: TRS)

Fund manager Eley Griffiths has conviction in the discount retail business, The Reject Shop. The fundie said: “The ASX share sits at the early stages of a planned multi-year turnaround. New management have a reset balance sheet, strong brand and an operating model awaiting refinement. We have identified several levers where value for shareholders should be unlocked.” WAM Microcap Limited (ASX: WMI) is another fund that owns Reject Shop shares.

In FY20 the small cap ASX share reported that its sales grew by 3.4% with comparable store sales growth of 3.5%. In the first half comparable sales rose 0.5% and in the second half it rose 7.1%.

Before AASB 16, FY20 EBITDA grew by 30.1% to $23.7 million. It generated $4.5 million of earnings before interest and tax (EBIT), up from a loss of $23.3 million in FY19, and it made $2.7 million of net profit after tax (NPAT), up from a $16.9 million loss in FY19.

At the end of FY20 it had $92.5 million of cash on the balance sheet and no drawn debt. It generated free cashflow of $61.6 million, up from a $1.9 million outflow in the prior corresponding period.

In FY21 the company will be focused on EBIT growth with cost reductions through business simplification and operational efficiency. At the annual general meeting (AGM), the leadership said it will consider whether to pay a dividend in FY21.

According to projections on Commsec, at the current Reject Shop share price it’s valued at 12x FY23’s estimated earnings.

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Tristan Harrison owns shares of WAM MICRO FPO. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Temple & Webster Group Ltd. The Motley Fool Australia has recommended Temple & Webster Group 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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