2 ASX small-cap shares to buy that this fund manager is excited about

Smaller businesses have the potential to create bigger returns. Here are two contenders.

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Key points

  • The fund manager WAM has picked out two compelling ASX small-cap shares
  • Temple & Webster has returned to revenue growth, it has a strong balance sheet and is investing in AI
  • Serko is experiencing a strong upswing of travel demand

Fund manager Wilson Asset Management (WAM) has identified two top ASX small-cap shares that could be investment ideas.

WAM operates several listed investment companies (LICs). Some, such as WAM Leaders Ltd (ASX: WLE) and WAM Capital Limited (ASX: WAM), focus on larger companies.

Another is WAM Microcap Limited (ASX: WMI). It focuses on small-cap ASX shares with relatively low market capitalisations at the time of acquisition.

The fund manager outlined these ASX small-cap shares from its microcap portfolio in a recent monthly update.

Temple & Webster Group Ltd (ASX: TPW)

WAM described Temple & Webster Group as an online furniture and homeware retailer. The company has a drop-shipping model where suppliers send products directly to customers. This enables "faster delivery times and reducing the need to hold inventory".

Last month, the ASX small-cap share announced it had returned to year-over-year growth after a prolonged period where operations were impacted by the COVID-19 pandemic.

The fund manager noted that Temple & Webster's full-year guidance for the earnings before interest, tax, depreciation and amortisation (EBITDA) margin was still 3% to 5%. The company also said that it had $100 million of cash with no debt.

WAM explained its bull case for the business:

We are pleased to see the company's investment in artificial intelligence to enhance its customers' shopping experience and boost competitiveness, and believe this will be an advantage to the business by gaining market share.

Serko Ltd (ASX: SKO)

The fund manager said this company delivered travel and expense solutions in more than 35 countries.

Last month, Serko released its FY23 result for the 12 months to 31 March 2023, which showed total revenue year-over-year growth of 154% to $48 million, beating its guidance range of between $42 million to $47 million.

Serko also reported that its online bookings had increased by 93%, with a 381% rise in occupied rooms through 'Booking.com for business'.

WAM said that Serko's results reflected "its focus on cost discipline, investments to improve scale and growth as well as the strong recovery in business travel in Australia and New Zealand".

The fund manager highlighted its key reasons for liking the ASX small-cap share:

We remain optimistic that it can achieve its guidance of $63 million to $70 million revenue in FY24, and its aspiration of $100 million in FY25, as business travel improves and their partnership with Booking.com for business continues to grow.

Motley Fool contributor Tristan Harrison has positions in Wam Microcap. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Serko and Temple & Webster Group. The Motley Fool Australia has recommended Serko and Temple & Webster Group. 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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