There are some ASX small cap shares worth 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).
COG Financial Services Ltd (ASX: COG)
COG was the only business in the Naos Small Cap Opportunities portfolio to give a meaningful update during January.
This small cap ASX share, as the name suggests, provides a number of financial services including finance, broking, aggregation and it also owns a stake of a debenture issuer.
Naos explained that COG revealed its FY21 half-year net profit after tax and amortisation (NPATA) would be $10.1 million, which would be an increase of 140% compared to the prior corresponding period.
The fund manager was pleased that the profit growth is translating into strong free cash flow with unrestricted cash and term deposits of $53 million (not including the $17 million investment in Earlypay Ltd (ASX: EPY)), compared to a market capitalisation of $149 million with minimal gross debt.
Naos said the small cap ASX share's profit growth was driven by two main factors, the first of these being the finance, broking and aggregation division, where margins have increased as the business continues to improve efficiencies through automation as well as offering complementary services to their clients such as insurance broking.
The other key driver, according to the fund manager, was the increased ownership of debenture issuer Westlawn Finance. Naos believes that Westlawn has continued to be a beneficiary in the growth of the debenture book, as well as the growth of its insurance broking arm.
COG said that it will be rolling out a 'hub and spoke' insurance broking model to all their owned and aggregated broker members in the coming months.
BSA Limited (ASX: BSA)
Naos describes BSA as a solutions-focused technology services small cap ASX share.
BSA assists clients in implementing their physical assets, needs and goals in the areas of building services, infrastructure and telecommunications. BSA clients include the National Broadband Network (NBN), Aldi Supermarkets, Foxtel and the Fiona Stanley Hospital.
The fund manager outlined the investment case for BSA. Even though the company had an eventful 2020, Naos thinks there are some significant catalysts.
The first relates to the $4.5 billion that the NBN is looking to spend over the next three years to continue to upgrade specific parts of the network. Naos believes that the small cap ASX share is well positioned to secure part of this work as it continues to deepen its relationship with the NBN, as demonstrated through its recent contract win.
Secondly, Naos thinks the recent acquisition of Catalyst One provides an opportunity to potentially transform a $15 million revenue business into a $100 million business over the next three to five years if BSA can successfully combine the Catalyst One offering with the existing skillset of the business to offer a one-stop solution for customers around both their current and future wireless capability needs.
The fund manager also said that BSA could be more aggressive with an active buyback and a higher payout ratio could be achieved given the large cash balance on the balance sheet.