Respected fund manager Wilson Asset Management (WAM) has recently identified two small cap ASX shares that it owns in its portfolio.
WAM operates several listed investment companies (LICs). Some focus on larger companies like WAM Leaders Ltd (ASX: WLE) and WAM Capital Limited (ASX: WAM).
There's also one called WAM Microcap Limited (ASX: WMI) which targets small cap ASX shares with a market capitalisation under $300 million at the time of acquisition.
WAM says WAM Microcap targets the most exciting undervalued growth opportunities in the Australian microcap market.
The WAM Microcap portfolio has delivered gross returns (that's before fees, expenses and taxes) of 23.8% per annum since inception in June 2017, which is superior to the S&P/ASX Small Ordinaries Accumulation Index average return of 10.3%.
These are the two small cap ASX shares that WAM outlined in its most recent monthly update:
National Tyre & Wheel Ltd (ASX: NTD)
WAM Microcap explained that National Tyre & Wheel operates entities in Australia, New Zealand and South Africa, supplying tyres and wheels to retailers and wholesalers. According to the ASX, National Tyre & Wheel has a market capitalisation of $122 million.
In January, the company announced that all business units were exceeding expectations and increased earnings guidance for its FY21 interim results, with operating earnings before interest, tax, depreciation and amortisation (EBITDA) expected to be between $15 million to $15.5 million, up from $11.5 million to $12.5 million.
After the acquisition of competitor Tyres4U in July, WAM expects the small cap ASX share will deliver substantial synergies over the next few years.
Seven West Media Ltd (ASX: SWM)
The fund manager said that this ASX share is the company that owns the Seven Network, which produces popular television shows such as Home and Away and newspapers such as The West Australian. According to the ASX, Seven West Media has a market capitalisation of $684 million.
WAM Microcap is positive about the company's recent appointment of the CEO, James Warburton.
Mr Warburton has a strategy for the company to improve the ratings and sell non-core assets of the small cap ASX share.
The fund manager said that Seven West Media has also benefited from a cost out program implemented during the onset of the COVID-19 pandemic, which will support earnings given the increase in television advertising expenditure.
Wilson Asset Management is expecting earnings upgrades and divestments to be key catalysts for the company in its half year result.
At the company's annual general meeting (AGM), Seven West Media gave a trading update that said that the market has improved since the August results, but remains volatile. The metro free to air (FTA) market was down 5% year on year for the period from July to October. Over the same period, the broadcaster video on demand (BVOD) market continues to strongly, up 37%, with 7plus capturing share and growing 62% in that period.
The small cap ASX share said that forward bookings suggest Seven's advertising revenue for the first half could be down approximately 5%. However, cost savings (excluding jobkeeper) has more than offset this revenue decline.
At the end of October it had reduced net debt to $425 million with $750 million in drawn facilities and $325 million cash after a "relentless focus" on cashflow.
