Investing in ASX small-cap shares

Investing in ASX small-cap shares

Small-cap shares can have significant growth potential – after all, many large-cap stocks were once small caps. Where the value of a small-cap share increases, so does the wealth of its investors. 

In this article, we look at why ASX small-cap shares may be worth considering for your share portfolio.

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What are ASX small-cap shares? 

A small-cap share typically has a market capitalisation ranging from a few hundred million up to $2 billion. The benchmark for ASX small caps is the S&P/ASX Small Ordinaries Index (ASX: XSO). It represents 200 companies ranked 101-300 in the S&P/ASX 300 Index (ASX: XKO).

Small-cap shares are not as well covered by analysts and the media as large caps and are generally not household names. They may be too small for fund managers to invest in, as many managers won’t buy into a company until its market capitalisation reaches a minimum level. The lack of institutional interest means small-cap shares are often overlooked by investors. 

Why invest in ASX small-cap stocks? 

The majority of the approximately 2,000 companies listed on the ASX are small-cap businesses. Small caps are generally classified as shares that fall outside the biggest 100 companies by market capitalisation. 

One of the advantages of investing in small-cap shares is their growth potential, which is mostly unmatched by larger companies.

Small-cap shares can have the potential to deliver significantly higher share price appreciation than large caps.

5 top small-cap share performers in FY22

(based on market capitalisation from high to low)

Company Market capitalisation Description
Telix Pharmaceuticals Ltd (ASX: TLX) $1.31 billion A radiopharmaceutical company developing
a portfolio of diagnostic and therapeutic assets
using molecularly targeted radiation
Collins Foods Ltd (ASX: CKF) $1.21 billion Operates KFC and Taco Bell restaurants in Australia,
Germany, and the Netherlands
City Chic Collective Ltd (ASX: CCX) $718 million A multi-channel retailer with a range of
internationally-recognised plus-size brands
Accent Group Ltd (ASX: AX1) $699 million Footwear and apparel retailer with more than 700
stores and 19 brands
Silk Laser Australia Ltd (ASX: SLA) $139 million Runs clinics offering laser hair removal,
skin treatments, body sculpting, and injectables

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Telix Pharmaceuticals 

Telix Pharmaceuticals uses molecularly-targeted radiation to develop diagnostic and therapeutic assets. These assets aim to address medical needs in relation to prostate, kidney, brain, and hematologic cancers, as well as a range of immunologic and rare diseases. 

Using nuclear medicine, Telix is focused on the development and commercialisation of clinical-stage oncology and rare disease programs. This is underpinned by a secure global supply chain with a distribution network across 80 countries and a manufacturing footprint in 11 countries. 

Telix says it is well-funded to execute on the next phase of its growth strategy, with a cash balance of $189 million at the end of 2021. Regulatory approval was received for the company’s prostate cancer imaging agent, Illuccix, in 2021. Telix plans to use this as a commercial launchpad to create a high-value diagnostic portfolio. The focus for 2022 is unlocking value in the company’s pipeline. This involves the global rollout of Illuccix and the advancement of a number of studies involving the diagnosis and treatment of brain and kidney cancers. 

Key metrics: 

  • Market cap: $1.31 billion (as of 28 April 2022)
  • Average daily volume: 1.44 million
  • Headquarters: Melbourne, Victoria

Collins Foods 

Collins Foods operates KFC and Taco Bell restaurants in Australia and Europe. The company has 261 restaurants in Australia, 16 restaurants in Germany, and 45 restaurants in the Netherlands. Solid growth was evident in its most recent half-year results, with a strong recovery in Europe. 

Revenue for the half was up 9.5% to $534.2 million, delivering net profit after tax (NPAT) of $26.4 million, up from $20.9 million in the prior corresponding period. Eight restaurants were acquired in the Netherlands in late FY21 and the first half of FY22, which are outperforming expectations. The company is on track to open 17 to 24 new restaurants in FY22. 

Collins Foods plans to open 55 new restaurants in Australia by 2028, and is leveraging its strong balance sheet to selectively purchase freehold sites for future development. Sustainable long-term growth will be driven by building on and leveraging brand strength. 

Key metrics: 

  • Market cap: $1.21 billion (as of 28 April 2022)
  • Average daily volume: 353,228
  • Headquarters: Hamilton, Queensland  

City Chic Collective 

City Chic Collective is an omnichannel apparel and accessories retailer catering to plus-size women. The company sells through a network of 94 stores across Australia and New Zealand and websites operating in Australia, New Zealand, the United States, the United Kingdom, and Europe. Brands are also sold through third-party marketplace and wholesale partners in the US, Canada, UK, Europe, and the Middle East. 

City Chic performed strongly in 1H FY22 and has achieved 25% sales growth in the second half to date. Partner channel sales have grown by 465% during the half, extending the omnichannel presence in key markets. Despite global supply chain volatility, inventory in global markets is ready to support continued growth. 

The global plus-size market is worth some US$180 billion and forecast to grow at 7% annually. City Chic’s global product range includes some 8,000 styles across multiple brands. 

The company has identified significant market share opportunities in the US and UK markets and is focused on expansion and cross-selling activities. Partnerships with retailers such as Amazon and Walmart form part of the customer acquisition strategy, bringing awareness to City Chic’s brands. 

Key metrics: 

  • Market cap: $718 million (as of 28 April 2022)
  • Average daily volume: $1.56 million
  • Headquarters: Alexandria, New South Wales 

Accent Group 

Accent Group is a footwear and apparel retailer distributing brands including CAT, Hype DC, Sketchers, Saucony, and Vans. The business has a network of more than 700 stores across Australia and New Zealand which delivered earnings before interest, tax, depreciation, and amortisation (EBITDA) of $99.5 million in the first half of FY22. 

Despite the impacts of COVID-related store closures, Accent was able to grow online sales and trade through its inventory. More than 100 stores were opened during the half with more than 600,000 customers added to the customer database. 

Accent Group expects to open 140 new stores in FY22, and to close stores where sustainable lease renewal terms cannot be achieved. It is seeking to deliver best in class margins via gross margin expansion initiatives and cost efficiencies. Future growth initiatives are focused on digital channels and new stores as the company aims for market share growth in the $6 billion performance and lifestyle segment. 

Key metrics: 

  • Market cap: $699 million (as of 28 April 2022)
  • Average daily volume: $1.4 million
  • Headquarters: Melbourne, VIC 

Silk Laser Australia

Established in 2009 and listed on the ASX in 2020, Silk Laser Australia is one of Australia and New Zealand’s largest specialist non-surgical aesthetics clinic networks. The company’s clinics offer laser hair removal, skin treatments, body sculpting, and injectables. Silk Laser has reported it is on track for EBITDA of $20 million in FY22, ahead of consensus forecasts. 

The injectables category has shown resilience and is underpinning repeat revenue growth, now comprising 45% of network cash sales. 

Silk Laser Australia’s strong franchise partner network continues to expand. Since FY20, the network has grown from 52 clinics generating $6.2 million of EBITDA to 121 clinics forecast to deliver FY22 EBITDA of at least $20 million. The company has opened three clinics in 2022, and expects to continue with an opening rate of 6 to 10 new clinics in the next 12 months. 

Key metrics: 

  • Market cap: $149 million (as of 28 April 2022)
  • Average daily volume: 63,332
  • Headquarters: Adelaide, South Australia  

Are small-cap stocks right for you? 

Small-cap shares have the potential to deliver outsized returns. But higher potential rewards come with a heightened degree of risk. Small-cap companies do not have the same level of capital as mid- and large-cap shares. 

This means the financial resources they have to keep the company running and growing are more limited, leaving them more vulnerable to failure. Small-cap shares also tend to be less liquid than larger-cap shares, meaning it may take more time to sell small-cap shares at a price that reflects their value. Nonetheless, their potential for outperformance means small-cap shares can help boost returns in a well-diversified portfolio

Last updated May 2022. Motley Fool contributor Katherine O'Brien has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Collins Foods Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended SILK Laser Australia Limited. The Motley Fool Australia has recommended Collins Foods Limited and SILK Laser Australia Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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