Having a little exposure to the small side of the share market can often be a good thing.
That's because small cap ASX shares have the potential to deliver market-beating returns if you can find the diamonds in the rough.
Two potential diamonds according to Morgans are named below. Here's why the broker is tipping them to deliver returns of 20% to 45% over the next 12 months:
Acrow Ltd (ASX: ACF)
Morgans thinks that Acrow could be a small cap ASX share to buy. It is a provider of smart integrated construction systems across formwork, industrial services, and commercial scaffolding in Australia.
It thinks its shares are undervalued at less than 10x earnings and with a 5%+ dividend yield. The broker said:
ACF's strategy has focused on supplementing organic growth with complementary acquisitions, enhancing scale and enabling entry into new markets. We estimate that 58% of EBITDA growth between FY18-25A was driven organically, while 42% came from acquisitions. Over the past two years, ACF has strengthened its Industrial Access offering through four acquisitions. If ACF hadn't done these deals, we estimate that FY24A-26F underlying EPS would be between 4-18% lower.
We make no changes to earnings forecasts and maintain our BUY rating and $1.32 target price. Trading on 9.8x FY26F PE with a 5.3% yield, we continue to view ACF as an attractive investment with the company's long-term growth prospects remaining strong despite some near-term uncertainty around the commencement of key projects.
Morgans has a buy rating and $1.32 price target on the company's shares. Based on its current share price of $1.08, this implies potential upside of 22% for investors over the next 12 months.
Symal Group Ltd (ASX: SYL)
Another small cap ASX share that Morgans is positive on is Symal Group.
It describes itself as a self-performing Australian construction group focused on civil infrastructure, contracting, plant and equipment hire, material sales, recycling, and remediation via a vertically integrated project delivery model.
Morgans notes that despite its strong returns on capital, the market is valuing its shares at a significant discount to most of its peers. It feels that this has created a buying opportunity for investors. It said:
Despite SYL continuing to deliver strong returns on capital across diversified and resilient end markets, the stock is trading at a PER half its peers, and we believe investors are over discounting the risks associated with construction contracting.
For example, if we compare SYL's contingent liabilities (bank guarantees) to revenue, its exposure (along with margins) is in line (if not above) with peers. Our conviction in SYL's risk management is further supported by strong cash conversion and substantial insider ownership. On this basis, we rate SYL a BUY with a $2.40/sh target price.
The broker currently has a buy rating and $2.40 price target on its shares. Based on its current share price of $1.65, this suggests that upside of 45% is possible between now and this time next year.
