2 small-cap ASX shares I’d buy to target outsized returns

two children squat down in the dirt with gardening tools and a watering can wearing denim overalls and smiling very sweetly.

two children squat down in the dirt with gardening tools and a watering can wearing denim overalls and smiling very sweetly.

I believe the right small-cap ASX shares have the potential to deliver very good growth over the long term. Here, I’m going to tell you about two that could do well in the 2020s.

Businesses with less than $1 billion in market capitalisation can double in size and still be relatively small compared to large businesses such as Woolworths Group Ltd (ASX: WOW), Telstra Group Ltd (ASX: TLS), and Commonwealth Bank of Australia (ASX: CBA).

The earlier we can identify a business on a good growth journey, the better it is for achieving sizeable returns. In my opinion, the below two options are appealing companies.

RPMGlobal Holdings Ltd (ASX: RUL)

RPMGlobal is a software business that describes its focus on “delivering mining productivity through technology enablement”. The company touts its “innovative” service offerings as useful in guiding its customers through current and emerging challenges facing the industry worldwide. This includes “helping them meet the shift in social norms and consumer and investor expectations to zero-carbon”.

The company helps clients transition from existing cloud and enterprise solutions to a full software as a service (SaaS) offering. Some of its clients include South32 Ltd (ASX: S32), Fortescue Metals Group Ltd (ASX: FMG), Sayona Mining Ltd (ASX: SYA), and Glencore.

The small-cap ASX share is seeing good growth. In FY23, it’s expecting revenue to be $96.4 million, up 16% from its underlying FY22 revenue of $83.1 million. This could help the company deliver underlying earnings before interest, tax, depreciation and amortisation (EBITDA) of $14.2 million, up from $3.5 million in FY22.

RPMGlobal is also anticipating strong growth in Southern Asia. The company says it’s “excited about the magnitude of the opportunities… entering the company’s software pipeline”. It reports it’s seeing increased interest in its next generation of mobile solutions which digitise forms and processes.

According to Commsec estimates, the small-cap ASX share is valued at 19 times FY25’s estimated earnings.

Propel Funeral Partners Ltd (ASX: PFP)

Propel is the second-largest funeral operator in Australia and New Zealand.

It’s steadily increasing its presence in the two countries by making bolt-on acquisitions. It recently announced the acquisition of Olsens Funerals in Sydney and J Fraser & Sons in Southland, New Zealand for up to $41.2 million.

The business is benefiting from Australia’s growing and ageing population. In fact, death volumes are expected to increase 3.1% per annum from 2021 to 2032 in Australia.

In the first half of FY23, the company saw a 14.3% rise in the number of funerals to 9,061 and a 7.5% rise in the average revenue per funeral. This helped its revenue grow 23.3% to $83.8 million, enabling operating net profit after tax (NPAT) to jump 34.9% to $11 million.

The small-cap ASX share has defensive earnings and a growing property portfolio that’s valued at around $142 million (at cost).

Commsec numbers suggest the company’s earnings per share (EPS) and dividend could grow each year to FY25. Using those projections, the Propel share price is currently valued at 21 times FY25’s estimated earnings with a possible grossed-up dividend yield of 4.9%. Those are appealing numbers to me.

The post 2 small-cap ASX shares I’d buy to target outsized returns appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has positions in Fortescue Metals Group. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended RPMGlobal. The Motley Fool Australia has positions in and has recommended Telstra Group. The Motley Fool Australia has recommended Propel Funeral Partners and RPMGlobal. 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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