2 ASX small cap shares that could be ready to outperform: fund manager

These two small companies may have big potential.

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Key points

  • WAM has named two small-cap ASX shares that are promising
  • Serko is benefiting from the COVID-19 travel rebound, as well as improving profit margins
  • Service Stream just received a huge tax refund, boosting its balance sheet

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 two ASX small-cap shares from its microcap portfolio in a recent monthly update.

Serko Ltd (ASX: SKO)

WAM described Serko as a leading provider of online corporate travel booking and expense management software to customers around the world.

Last month, the ASX travel software business gave investors a trading update at its annual general meeting (AGM) that confirmed its guidance provided in May that FY24 total income is expected to be between $63 million to $70 million.

WAM pointed out the company noted that if trends of the three months to June 2023 continue for the rest of the year, it expects to hit the mid-point of its guidance range.

In its concluding comments about the company, the fund manager said:

We continue to believe the company's strong financial position will allow it to achieve operational efficiency and build a globally competitive business moving forward.

Service Stream Ltd (ASX: SSM)

The fund manager says that Service Stream provides essential network services to the telecommunications, utility, and transportation sectors.

Last month, Service Stream said after lodging its FY22 tax return, it received a tax refund to the tune of $50.2 million, thanks to the company's eligibility for the "temporary loss carry back tax offset" initiative.

WAM said that the large tax refund has helped "alleviate" concerns about the short-term strength of its balance sheet. While the business would have been able to carry forward the tax loss against tax payable in future income years, the company said it would provide "an immediate cash flow benefit to Service Stream, but does not have any impact, other than refunded interest costs, on the FY23 operating result".

The fund manager then said:

We remain positive that Service Stream is able to deliver solid FY2023 full-year results and continue to deliver its services as a national multi-network service provider.

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. The Motley Fool Australia has recommended 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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