I think these 2 ASX small cap shares could make big returns

Two kids in superhero capes.Two kids in superhero capes.

Many small-cap ASX shares don’t get a lot of attention, but they may be able to achieve stronger returns than blue-chip ASX shares.

A business that goes from a market capitalisation of $200 million to $500 million represents an impressive gain. But $500 million would still count as a relatively small business compared to names like Telstra Group Ltd (ASX: TLS) and Commonwealth Bank of Australia (ASX: CBA).

Certainly, it can be a much harder task for a business worth $20 billion to grow to $50 billion.

Yet just because a business is small, it doesn’t automatically mean that it’s going to grow significantly. However, I think the following two can generate market-beating returns over the next three to five years.

Dusk Group Ltd (ASX: DSK)

Dusk describes itself as a specialist in home fragrance products, offering “a range of Dusk branded premium quality products at competitive prices”. Dusk designs its product range which is exclusive to the company.

Its offerings include candles, ultrasonic diffusers, reed diffusers, and essential oils, as well as fragrance-related homewares. The goal of the company is to be “customers’ preferred destination for home fragrance products and for their gifting needs”.

I think the dividend income from the small-cap ASX share alone could be very attractive. Certainly, if the dividend income can beat the returns of the ASX share market, then we don’t need to rely on strong capital gains.

Commsec numbers suggest the dividend per share could be 14 cents, which would be a grossed-up dividend yield of 13%. By FY25, the business could pay a dividend per share of 18 cents per share which would be a grossed-up dividend yield of 16.8%.

The business could generate earnings per share (EPS) of 19.9 cents in FY23, which suggests the Dusk share price is valued at under eight times FY23’s estimated earnings. At the end of the first half of FY23, it had net cash of $32.9 million, meaning its balance sheet is in a strong position.

The business is planning to grow by launching new products, expanding its store network, increasing benefits of scale, and long-term growth of online sales.

Universal Store Holdings Ltd (ASX: UNI)

This small-cap ASX share owns a portfolio of “premium youth fashion brands and omni-channel retail and wholesale businesses”. Those brands include Universal Store, THRILLS, and Perfect Stranger. It has more than 90 physical stores with a target market of 16 to 35-year-olds.

The retail business may be less impacted by higher interest rates because not many of its customers may have (large) mortgages.

Universal Store is seeing increasing profit margins as it grows, which is promising as it becomes larger. In the first half of FY23, group sales grew by 34.5% to $145.7 million and underlying earnings before interest and tax (EBIT) increased 43.2% to $28.5 million.

By the end of FY23, it’s looking to have between 101 to 103 group stores across the three brands.

Commsec numbers suggest Universal Store earnings and its dividends are going to keep rising between FY23 to FY25. It’s valued at less than 11 times FY23’s estimated earnings and under eight times FY25’s estimated earnings – suggesting 34% growth between FY23 to FY25.

The dividends could also be impressive in the coming years. The small-cap ASX share’s grossed-up dividend yield in FY23 could be 8.3%, while the FY25 grossed-up dividend yield could be 11.4%.

The post I think these 2 ASX small cap shares could make big returns appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison 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 positions in and has recommended Telstra Group. The Motley Fool Australia has recommended Dusk Group. 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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