3 'attractive' small-cap ASX shares ready to rocket in 2024

They ended 2023 with a bang, but the gurus at IML reckon the smaller ASX businesses have more catching up to do this year.

| More on:
three children wearing superhero costumes, complete with masks, pose with hands on hips wearing capes and sneakers on a running track.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

After two years of shocking underperformance, ASX small-cap shares made a stunning comeback towards the end of 2023.

"Despite the negativity that pervaded most of last year, the small cap market ultimately managed to deliver solid returns in 2023," said IML analysts in a blog post.

"A rally late in the year saw the ASX Small Ordinaries up +7.8% for the calendar year, with the Small Industrials up +11.4%."

Notwithstanding the recent run upwards, the IML team believes small caps are still playing catch-up.

"Small cap valuations remain attractive compared to large caps with superior earnings growth forecasts," read the memo. 

"On an individual stock level there remain plenty of quality small cap industrials trading at attractive valuations."

Here are three stocks in particular they're loving right now:

Reliability of transport contracts 

Kelsian Group Ltd (ASX: KLS) is a transport provider that operates in Australia and various other countries.

The IML team likes how much of its revenue is consistent and reliable.

"The Australian, Singapore and UK operations are underpinned by long-term government contracts. 

"Effectively the earnings under these contracts are inflation-protected, providing a defensive earnings stream with growth coming from new bus routes and generating efficiencies."

In the US, Kelsian's clientele is the private sector, but those earnings are also reliable with "no patronage risk borne by the company".

"With the revenue significantly contracted, recent tender wins in Sydney and the initial contribution of All Aboard America, Kelsian is well placed to deliver solid earnings growth in FY24.

"Further upside in FY25 is possible from further public bus contract wins in Australia and the UK, as well as bolt-on acquisitions in the USA."

The Kelsian share price has rocketed more than 21% since early October, but the IML team reckons it still has legs.

"Kelsian's valuation is conservative in our view, on 15 times FY25 earnings and a [dividend] yield of 4%."

Reliability of an ageing population

Pathology services provider Australian Clinical Labs Ltd (ASX: ACL) had a busy time testing Australians during the COVID-19 pandemic, but since then the stock has been going sideways.

The demographic trends reassure IML analysts of its future though.

"Australia's ageing population ensures ongoing growth in testing volumes, as older people are more likely to have health issues requiring regular monitoring. 

"The number of conditions able to be assessed by pathology testing continues to grow, also underpinning growth in volumes."

In the short-term, business has been slower because of "doctor shortages and cost of living pressures". 

"History indicates that these growth rates are likely to return to trend over time."

ACL doesn't have much debt and is in a position to make acquisitions. An attempt to merge with Healius Ltd (ASX: HLS) last year was aborted due to a poor business update on the other side.

"The synergies from such a merger are significant, making a future transaction an attractive opportunity, subject to [regulatory] approval. 

"Trading on only 13.5 times FY25 earnings and a yield of over 5%, we believe ACL is attractively priced."

Reliability of outsourcing

SG Fleet Group Ltd (ASX: SGF) is the dominant player in Australia in the fleet management industry, and also operates in the UK and New Zealand.

The business has benefitted from two trends, according to IML analysts.

"The company is effectively an asset manager of large corporate fleets and has benefitted from the gradual outsourcing of fleet management services across government and corporate.

"SG Fleet also operates a novated fleet-leasing operation in Australia, which is benefitting from recent government initiatives to promote electric vehicle (EV) take-up in Australia."

Its contracts are multi-year with a strong history of renewal.

The shortage in new cars arising from the pandemic and subsequent rise in trade-in values dented SG Fleet's earnings.

"These factors have overshadowed recent results, creating noise in the results and hence creating uncertainty for investors, weighing on the share price."

The downside, however, is now "excessively" priced in, the IML team added.

"SG Fleet is very attractively priced, trading on under 10 times FY25 earnings and a dividend yield of over 7%."

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Small Cap Shares

Three young people in business attire sit around a desk and discuss.
Small Cap Shares

3 ASX penny stocks I don't think will be below 80 cents much longer

These sub-dollar shares are all capable of smashing through to another level, say experts.

Read more »

Kid on a skateboard with cardboard wings soars along the road.
Small Cap Shares

Want to make big returns? ASX small-cap shares are poised to outperform

Smaller businesses could be compelling investments today, according to an expert.

Read more »

The Two little girls smiling upside down on a bed.
Small Cap Shares

Where I'd invest $5,000 into ASX small-cap shares aiming for big growth

I love the potential of how big these small stocks could become.

Read more »

A young woman makes an online travel booking as she sits on some steps with her suitcase next to her.
Opinions

I think this ASX small-cap share can soar in 2024

This stock could keep travelling higher over time.

Read more »

Three young people in business attire sit around a desk and discuss.
Opinions

3 reasons why I'd buy small-cap shares over ASX blue chips in 2024

I’m excited by the potential of small stocks.

Read more »

A couple stares at the tv in shock, one holding the remote up ready to press.
Small Cap Shares

Why Bell Potter says these ASX small cap shares are buys

The broker has only good things to say about these stocks.

Read more »

Two kids in superhero capes.
Small Cap Shares

'Substantial returns over years ahead': 2 ASX small caps starting 2024 with a bang

Smaller companies have struggled over the past two years compared to their larger rivals, but this year could see the…

Read more »

The Two little girls smiling upside down on a bed.
Small Cap Shares

2 small-cap ASX shares licking their lips over interest rate cuts

Celeste Funds names a pair of finance stocks that could be in for a winning 2024 as consumer and business…

Read more »