The ASX stock Close The Loop Ltd (ASX: CLG) is a small-cap share I'm excited about. I recently decided to buy more of it for my investment portfolio.
I don't own many shares with market capitalisations under $500 million. But, in my opinion, smaller businesses generally have more growth potential because we're able to get in at an earlier point of their growth journey.
What Close The Loop does
The company has locations across Australia, the United States, South Africa, and Europe. Through its resource recovery division, it collects and repurposes products with 'takeback' programs. The ASX stock also has a sustainable packaging division, which allows for "greater recoverability and recyclability".
The overall mission is "zero waste to landfill".
Close The Loop recovers from a wide variety of products, including electronic products, print consumables, cosmetics, plastics, paper, and cartons. It also reuses toner and post-consumer soft plastics as an asphalt additive.
Why I'm bullish about the ASX stock
The world is moving towards a circular economy where more of the products and materials are reused and recycled.
For example, computer giant HP — one of Close The Loop's main customers — wants to reach 75% circularity of its products and packaging by 2030. HP has reached 40% circularity by weight. By 2025, HP wants to use 30% post-consumer recycled plastic across its personal systems and print product portfolio. In 2022, it achieved 15% in HP products.
There appears to be a lot of volume growth still to come, with Close The Loop playing a key part. And HP is just one business.
The ASX stock's financials are outperforming expectations. In the FY24 first-half, Close The Loop generated $106.2 million of revenue, compared to the guidance for FY24 of $200 million. It reported strong growth from its recovery division driven by increased volumes and new programs.
The company also said the recently acquired ISP Tek Services had performed better than expected and opened opportunities in other jurisdictions.
The company's margins are growing, which bodes well for the long term as revenue grows. HY24 saw revenue increase 76%. Gross profit rose 94%, earnings before interest, tax, depreciation and amortisation (EBITDA) went up 139% to $22.7 million, and underlying net profit before tax jumped 204% to $15.2 million.
Close The Loop is doing a good job improving its balance sheet — in the FY24 first-half result, it reduced its net debt by $11.8 million to $26.2 million.
Close The Loop share price valuation
Forecasts are just educated guesses, but the valuation looks very appealing if the Commsec projections come true.
It's suggested that the business could generate earnings per share (EPS) of 4.2 cents in FY24 and 5.5 cents in FY25. That would put it at 7x FY24's estimated earnings and 5x FY25's estimated earnings.
If that's what it generates, this seems very cheap to me.
