Strong potential: Why I'd buy these 2 ASX small-cap shares

Both of these stocks could grow revenue and profit significantly in the next few years.

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Key points

  • I believe that small businesses typically have longer growth runways than large companies
  • Serko is an ASX travel software share that is benefiting from a strong recovery for travel demand
  • Allied health business Healthia is winning from a combination of acquisitions and organic growth

The ASX small-cap share space is an appealing place to fund investment opportunities that could grow substantially.

I think there are some relatively little businesses on course to grow into much bigger companies. And it's typically easier for a $100 million company to double in size to $200 million than it is for a $10 billion business to grow to $20 billion. Large companies can reach market saturation points and run out of suitable regions or customers to expand into.

One of the most exciting things on the ASX, in my opinion, is identifying businesses that could scale significantly in the next few years. I'm going to tell you about two of them.

Serko Ltd (ASX: SKO)

Serko describes itself as a leader in online travel booking and expense management for the business travel sector. The small-cap ASX share says its travel management app Zeno is "next generational", using "intelligent technology, predictive workflows and a global travel marketplace to transform business travel across the entire journey".

As travel demand rebounds, the ASX travel share is seeing a resurgence in performance. In the FY23 result for the 12 months to 31 March 2023, total income grew 154% to $48 million, while average revenue per booking increased 65% to $9.56. Serko's online bookings grew by 93% to 4.1 million, while its completed room nights on Booking.com for business were up 381% to 1.5 million.

The company was still going through travel recovery in FY23, so it made a net loss after tax of $30.5 million, but this was an improvement of 15% year over year.

In Serko's guidance for FY24, the company expects total income to be between $63 million to $70 million, representing growth of between 31% to 46%.

Aside from the ongoing travel demand, which is promising for a scalable software ASX travel share, I think the business has a positive future with its partnership with Booking.com. A lot of the growth came in the second half of FY23, so the FY24 first half's growth could also be very strong.

Travel management company CWT has committed to supporting an expanded Booking.com for business offering that will include "discounted business travel rates, access to membership rewards from a variety of loyalty programs and complimentary 24/7 travel agent support."

It aims to hit $100 million in total income in FY25, which could come with much-improved profit margins. The market appears to like what Serko has said recently, as we can see on the small-cap ASX share chart below.

Healthia Ltd (ASX: HLA)

Healthia comprises three divisions focused on different areas: bodies and minds, feet and ankles, and eyes and ears. The ASX healthcare share also has a growing network of clinics and stores across the country operating in these areas.

Each of these industries is fragmented, so there's plenty of room for the business to carry out acquisitions for a number of years, boosting its market share and scale.

I think the FY23 half-year result showed the benefit of the company's growth strategy. Healthia reported that for the six months to 31 December 2023, underlying revenue grew 34.3% to $124.9 million. Underlying earnings before interest, tax, depreciation and amortisation (EBITDA) rose 48.2% to $18.1 million, and underlying net profit after tax (NPATA) went up 48.3% to $9.2 million. This demonstrates the company's scalability.

Pleasingly, organic revenue increased by 5.4%, showing that it doesn't need to make acquisitions to grow at a decent rate. It has an organic growth rate target of between 3% to 6%, which would deliver solid compounding potential when combined with rising profit margins and a growing dividend.

In FY23, it expects to achieve underlying EBITDA of more than $40 million. I think it could grow profit significantly over the next five to ten years, helping push the Healthia share price higher.

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 positions in and has recommended Healthia and Serko. The Motley Fool Australia has recommended Healthia and Serko. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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