3 top small cap ASX shares this fund manager likes

Naos really likes these three small cap ASX shares.

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NAOS Small Cap Opportunities Company Ltd (ASX: NSC) is a listed investment company (LIC) that targets small cap ASX shares with market capitalisations between $100 million and $1 billion.

It runs a portfolio of high-conviction names. In the latest monthly update, the LIC only had seven positions in its portfolio which it views as long-term holdings.

The LIC is fresh from generating a portfolio performance of a 58.4% return over FY21 and it is still confident about these three ASX shares which just reported during reporting season:

BSA Limited (ASX: BSA)

BSA is a technical services contracting company.

The fund manager said that BSA produced a result consistent with what it has seen for a number years. It was a “credible” underlying result, particularly in the current conditions, but there were a number of one-off costs.

Naos noted that there was commentary about laying the foundations for the future. Underlying margins at the small cap ASX share also increased in FY21, so the fund manager believes that commentary is correct.

Naos was disappointed by the lack of substantial comments about capital management and a lack of tangible progress regarding acquisitions. The fund manager believes that BSA has a sound foundation to build on which “could lead to significant compounding returns for shareholders over time”. It is hoped by the fund manager that the potential will start to be realised in FY22.

COG Financial Services Ltd (ASX: COG)

COG, a financial services provider, revealed a result that showed underlying net profit (NPATA) rose by over 132%. Naos noted that the result had increased transparency compared to previous years along with “excellent” cash generation. The fund manager attributed the cashflow generation to COG’s capital light, distribution-focused business model.

Naos pointed out that the result allowed the small cap ASX share to grow its dividend by 295%. The dividend payout ratio was 62%.

The fund manager was also pleased that more transparency was also provided about its insurance broking strategy which is now starting to be implemented. The company has stated its ambitions to grow this to 50% of the earnings of the finance broking and aggregation division. Naos said if that can achieved, then the fund manager believes the insurance broking business could potentially contribute $15 million of earnings before interest, tax, depreciation and amortisation (EBITDA) in five years’ time.

Eureka Group Holdings Ltd (ASX: EGH)

Eureka was a provider of affordable rental accommodation for independent seniors within a community environment.

Naos said that that Eureka’s result confirmed the momentum that the business has building over the last two years. Underlying EBITDA was up around 22% and all key metrics like occupancy levels remain robust.

There was a slight negative that Naos pointed to from the small cap ASX share – there wasn’t greater detail revealed on its capital management strategy that would enable the business to scale significantly in the future.

The fund manager thinks that Eureka can become a much larger business but it may not need to own 100% of all of its assets on its own balance sheet. Naos points out there Greg Paramor is on the board, who has a lot of experience at Folkestone and more recently Charter Hall Group (ASX: CHC), he could help the business launch a funds management model which is a strategy Naos believes could be very beneficial for Eureka shareholders over the longer-term.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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