2 small cap ASX shares with a lot of potential: experts

City Chic is one small cap ASX share that may have tons of potential.

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Key points

  • Small cap ASX shares can have plenty of growth potential
  • City Chic is a globally-growing retailer of apparel for plus-size women which is growing strongly in the US
  • Volpara is a breast screening health technology business which is growing its subscription revenue at fast pace, with a gross profit margin

Small cap ASX shares may be able to provide an attractive amount of capital growth because they are starting from a relatively small base compared to the current size of the ASX’s blue chips.

Not every small business is destined to go on and achieve strong returns.

However, expert analysts have concluded that these two options look very compelling:

City Chic Collective Ltd (ASX: CCX)

City Chic is one of the world leading specialist retailers that sells plus-size clothing, footwear and accessories to women. It sells through a number of brands and websites including City Chic, Evans and Avenue.

In recent weeks the City Chic share price has been dropping, offering more value for prospective investors. Since 22 November 2021, City Chic shares have dropped 23%.

The broker Macquarie currently rates this small cap ASX share as a buy with a price target of $7.10. That suggests a potential rise of the City Chic share price of more than 40% over the next year.

City Chic recently provided a trading update for the 26 weeks to 26 December 2021. It included sales revenue growth of 49.8% to $178.3 million, namely thanks to growth of 62% in the Americas to $77.2 million. Both the City Chic USA and Avenue websites are performing strongly.

However, underlying earnings before interest, tax, depreciation and amortisation (EBITDA) is expected to be roughly flat and in a range of between $22.5 million to $23.5 million for HY22. Management said this was pleasing because of a $4 million EBITDA hit due to store closures, the impact of acquisitions and COVID-19 related market and cost reduction measures taken in the prior corresponding period.

Macquarie puts the City Chic share price at 26x FY23’s estimated earnings.

Volpara Health Technologies Ltd (ASX: VHT)

Volpara’s mission is to save families from cancer. It is well progressed with its breast cancer screening services and it is also working on a lung cancer offering as well.

Over 13.4 million US women are now using at least one Volpara product, as well as many women across Australia and New Zealand. In America, the small cap ASX share has a market share of around a third.

The healthcare technology business says that its strategic commercial partnerships set the stage for greater reach in not only genetic testing for breast cancer (which helps reduce risk for the patient) but also expansion into the US lung cancer market where AI and software offer the prospect of saving many lives.

Volpara continues to report a very high gross profit margin, it was higher than 91% in the first half of FY22. It also saw its subscription revenue jump 35% to NZ$11.8 million – an increase of 42% in constant currency terms. Annual recurring revenue (ARR) reached NZ$29 million at the end of the period.

The small cap ASX share is working on several ways to increase its average revenue per user (ARPU), which includes upselling more of its platform to the same clients so that they can provide a better service for clients and perform more efficiently.

Over the last three months the Volpara share price has dropped by around 30%.

Morgans currently rates the company as a buy with a price target of $1.94. That implies a potential upside over the next 12 months of almost 120%. In a recent newsletter, the company said that its third quarter of FY22 (to December 2021) has already beaten its previous best third quarter in terms of net new ARR added.

Should you invest $1,000 in City Chic right now?

Before you consider City Chic, you'll want to hear this.

Motley Fool Investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and City Chic wasn't one of them.

The online investing service he’s run for over a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.* And right now, Scott thinks there are 5 stocks that are better buys.

*Returns as of January 13th 2022

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. owns and has recommended VOLPARA FPO NZ. The Motley Fool Australia owns and has recommended VOLPARA FPO NZ. The Motley Fool Australia has recommended Macquarie Group Limited. 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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