ASX small-cap shares typically have a lot of growth potential, which can deliver over the long term. It's easier for a small company to double in size than a large business, for example.
While the S&P/ASX 200 Index (ASX: XJO) has a strong focus on ASX bank and mining shares, small-cap shares can provide diversification to different industries that are not necessarily in blue-chip territory.
A small business isn't guaranteed to do well, but I do like the prospects for the three names below.
Lindsay Australia Ltd (ASX: LAU)
Lindsay has a market capitalisation of $332 million, according to the ASX.
It describes itself as an integrated transport, logistics and rural supply company and a "leading national service provider" to the agriculture, horticulture and food-related industries.
A key part of the offering is that it can help farmers grow, package, transport and distribute their produce throughout Australia and the world.
The Commsec forecast suggests the business could grow its earnings per share (EPS) in FY24, FY25 and FY26. Those numbers put the current Lindsay share price at under 8x FY24's estimated earnings.
Lindsay's revenue has steadily grown since FY18, and it's investing in a number of projects that could help future profitability. These include new software services, property upgrades and expansions underway in Melbourne and plans being finalised for Adelaide and Perth.
The mid-point of the company's guidance of $105 million for FY24 would represent an increase of 16% compared to FY16.
Duxton Water Ltd (ASX: D2O)
Duxton Water is a company that owns a portfolio of Australian water entitlements which are leased to farmers on long-term and short-term leases. It has a market cap of around $230 million, according to the ASX.
The value of water entitlements has increased over the long term. We all need to eat food, and water is a key part of that food production. I think this ASX small-cap share is a good way to indirectly gain exposure to agriculture.
Duxton Water generates a pleasing amount of lease income each year, and this enables it to pay a steadily growing dividend.
The company is benefiting from the growing amount of water-hungry crops that are being planted, such as almonds.
I think the right time to invest is when there is a lot of rain because water entitlement values may go down (or at least see slower growth).
The Duxton Water share price is currently at a 52-week low, and I think this is the right time to invest.
Baby Bunting Group Ltd (ASX: BBN)
Baby Bunting is the leading retailer of baby and toddler-related products. Think of things like prams, car seats, clothes, toys, furniture, blankets and so on. It has a market cap of roughly $245 million, according to the ASX.
The Baby Bunting share price has sunk 30% in the last year, and it's down 70% since April 2021.
I think this much lower valuation is attractive, considering it still has a large and expanding Australian store network and a growing presence in New Zealand. The ASX small-cap share is also working on its digital sales, including its new marketplace offering.
As at 8 October 2023, total sales in FY24 had fallen 3.3%. The FY24 first quarter gross profit increased by 70 basis points year over year, and its administration costs were reduced by $1.7 million year over year.
According to the projection on Commsec, the Baby Bunting share price is valued at 10x FY25's estimated earnings with a possible grossed-up dividend yield of 10% for that year.
If it can get back to sales growth, I believe the business can kickstart a recovery in earnings and market confidence.
