Fund manager Wilson Asset Management has identified two ASX small-cap shares in the WAM Microcap Ltd (ASX: WMI) portfolio that may help shareholder returns thanks to takeovers.
The smaller end of the ASX share market can be the most exciting because of the amount of merger and acquisition activity that goes on there, as well as some businesses being able to scale up quickly because they're starting from a smaller base than larger ones.
These are the two stocks that have been picked out.
MMA Offshore Ltd (ASX: MRM)
WAM described MMA Offshore as a business that provides marine vessels and an array of subsea services to the offshore energy sector, government and defence and wider maritime industries.
The fund manager pointed out that in July, the ASX small-cap share announced a trading update, where it revealed expectations that earnings before interest, tax, depreciation and amortisation (EBITDA) will be between $66 million to $68 million. Achieving that EBITDA guidance would represent an increase of 100% year over year, and stronger than the market was expecting.
The cause of that EBITDA performance was due to a number of vessels "trading through the traditionally quieter Southeast Asian monsoon period, and strong demand from oil, gas and offshore wind markets which is driving price increases."
WAM commented on the company's outlook:
We expect the positive momentum for MMA Offshore to continue and see the potential for commentary around possible capital management or accretive bolt-on acquisitions at the upcoming 2023 full-year result.
Reject Shop Ltd (ASX: TRS)
The fund manager noted that Reject Shop has over 370 locations in Australia and is an ASX small-cap share that operates as a discount variety store chain offering a range of consumer goods and merchandise.
The retailing environment has been tough during the COVID-19 times, but WAM believes that the business is well-placed to operate in this inflationary environment because of the "cost-conscious product offering".
WAM also noted that freight costs are "starting to reduce" which should provide a tailwind for the business.
According to the ASX, it has a market capitalisation of $204 million. The fund manager pointed out that the company has $80 million of cash, so it could be a takeover target seeing as listed global peers trade on "much higher valuations".
WAM also referred to the takeover interest from Canadian business Dollarama, which was reported in the Australian Financial Review, though those talks reportedly ended.
