The fund manager Naos Asset Management has revealed two unloved ASX growth shares in its portfolio that it believes have compelling bull cases.
There are a number of things that the investors at Naos look for when deciding on a potential opportunity.
It's looking for businesses that are good value with long-term growth potential.
The portfolio is about finding quality over quantity. Naos' strategy is to invest for the long-term, it isn't a short-term trader. It doesn't mind holding fairly illiquid ASX shares as long as they can generate good performance.
Naos ignores the index – it invests in whichever investments that look promising. The fund manager provides pure exposure to 'industrial' businesses, though this is a wide category. It invests with an ESG overlay. That means investments need to be satisfactory when it comes to environmental, social and governance factors.
Every month the listed investment company (LIC) NAOS Ex-50 Opportunities Company Ltd (ASX: NAC) releases an update about how its portfolio is going and some thoughts on some of the ASX growth shares.
Here are two that featured this month:
Step One Clothing Ltd (ASX: STP)
Step One describes itself as a leading direct-to-consumer pure online retailer for men's underwear. That underwear is a range of high quality, organically grown and certified, and ethically produced products.
The Step One product is one that the Naos team have been using because they believe it's best of breed. It's one of the few on the ASX that Naos could say that about. Naos has been analysing the business in detail since it listed half a year ago.
Naos noted that within the last five years, Step One has gone from essentially $0 in revenue to potentially around $75 million in annual sales of men's underwear, mainly in Austrlaia and the UK.
The ASX growth share's initial public offering (IPO) price was $1.53 and Naos bought some shares at $2.25 in early December.
However, a business update in December said that revenue growth would be 1% to 5% higher than the prospectus forecast of 19.9% for FY22. After that update, the shares fell back to the IPO price.
Naos suggested the heavy share price reaction showed the update was well below the markets' "very bullish expectations" with some shareholders perhaps selling until they see more evidence of consistent growth again.
The fund manager added to its Step One investment after the trading update. Regarding the bull case, Naos said that the business can continue to grow at a reasonable rate over the coming years thanks to geographic and product expansion.
Urbanise.com Ltd (ASX: UBN)
This ASX growth share is another that has seen its share price fall. Over the last month, it's down by more than 20%.
Naos explained that Urbanise.com fell sharply after what some considered to be an abrupt exit of the CEO and the search for a replacement.
The fund manager believes that what has most likely unnerved the market is the risk that the company doesn't convert on its immediate sales pipeline and subsequently requires a capital raising. Naos doesn't think it would be a major issue if that happened.
The reason for that confidence is the assumption that growth rates (especially in the strata division) continue to be at least 20% per annum.
Naos thinks that company needs to focus on its strengths and uses a strategy that produce tangible results.
It is the fund manager's view that Urbanise.com has a dominant position within the strata space and must focus on achieving a market share of more than 65% of a market that has recurring revenue of around $40 million per annum in the shortest time possible.
The current valuation of annual recurring revenue (ARR) to the market capitalisation of "just" five times suggests to Naos that there is little faith from the market that the company can grow in the medium-term.
But, in the fund manager's opinion, if the company can demonstrate it can grow at around 20% per annum then the multiples applied to a business to business (B2B) enterprise software as a service (SaaS) business is likely to be significantly higher.
