If you’re wanting to invest in the small side of the Australian share market, then the three small caps listed below could be worth a closer look.

While there is certainly still a lot of work to be done, they could have very bright futures ahead of them. Here’s why they could be worth adding to your watchlist:

PlaySide Studios Limited (ASX: PLY)

PlaySide Studios is a Port Melbourne-based video game developer. It has a portfolio of 55 games across a range of categories, including self-published games based on original intellectual property and games developed in collaboration with Hollywood studios. The latter comprises titles relating to Jumanji, The Walking Dead, and Disney Pixar’s Cars. The company has also just signed a deal with Paramount for the Godfather franchise. Management estimates that PlaySide has a global market opportunity worth a total of $77.2 billion per annum.

Serko Ltd (ASX: SKO)

Another small cap share to watch is Serko. It is an online travel booking and expense management provider behind the Zeno Travel and Zeno Expense platforms. The former provides AI-powered end-to-end travel itineraries, cost control and travel policy compliance to corporate customers. Whereas the latter allows users to automate and streamline the expense administration function, identify out-of-policy expense claims, and prevent fraud. While the COVID-19 pandemic has hit the company hard, it has a very strong balance sheet and equally bright long term growth potential. This is thanks to the growing popularity of its platforms and its game-changing deal with travel giant Booking.com.

Volpara Health Technologies Ltd (ASX: VHT)

A final small cap to watch is Volpara. It is a healthcare technology company that uses artificial intelligence to assist with the early detection of breast cancer. The company achieves this by allowing users to analyse mammograms and associated patient data. They can then use this software to provide clinical decision support and practice management tools in a cost-effective way. Volpara is currently generating ~US$18.6 million (~NZ$27.9 million) in annual recurring revenues (ARR), but estimates that it has a US$750 million ARR opportunity in breast cancer screening. This gives it a significant runway for growth.

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It certainly has been an eventful year for the Nearmap Ltd (ASX: NEA) share price.

The aerial imagery technology and location data company’s shares have had a number of ups and downs.

Unfortunately, though, the downs have been dominating in recent weeks, leading to its shares trading 21% lower year to date.

Is this a buying opportunity for investors?

According to a note out of Morgan Stanley this morning, its analysts believe the recent weakness in the Nearmap share price is a buying opportunity.

The note reveals that its analysts have retained their overweight rating and $3.20 price target on the company’s shares.

Based on the current Nearmap share price of $1.81, this implies potential upside of approximately 77% over the next 12 months.

Why is Morgan Stanley remaining bullish?

Morgan Stanley notes that Nearmap’s management is confident it can deliver positive jaws in FY 2022. It is expecting to grow annual contract value (ACV), revenue, and cash receipts all quicker than its costs during the year.

This is a big positive given the company’s history of increasing costs and cash burn.

In addition to this, the broker was pleased with the extra clarity the company has provided in relation to its legal issues.

It notes that Eagleview’s patent infringement claim relates to roof-management techniques and not all elements of its product. Positively, this part of its offering accounts for less than a quarter of its US business.

Another positive that Morgan Stanley has highlighted is that the company has not experienced any material sales impacts because of the claim. This was a concern that many analysts had when the legal action was first announced.

Is anyone else positive on the Nearmap share price?

Morgan Stanley isn’t the only broker that believes the Nearmap share price can go higher from here.

While analysts at Citi currently only have a neutral rating on its shares, their price target of $2.00 implies potential upside of 10.5%.

Citi explained its view: “While Nearmap is confident that it can successfully defend against Eagleview’s allegations of patent infringement and in our view, Nearmap can still be successful in the US even if it were to lose the lawsuit, we downgrade to Neutral/High Risk as we expect the legal proceedings will likely have a negative impact on demand in the US and this uncertainty could weigh on the share price. New target price is $2.00 (-37%).”

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ASX investors have been keeping a wary eye on inflation indicators.

And for good reason.

If inflation remains at or below the Reserve Bank of Australia’s (RBA) target range of 2–3% on average, then investors can expect the official cash rate to remain at the current record low of 0.10% until 2024. Or perhaps longer.

Moreover, if inflation begins to run hot on the back of massive government spending and central bank quantitative easing (QE) programs intended to lift economies from their COVID slowdowns, then official interest rates may rise sooner.

Inflation expectations differ

Precisely when inflation and interest rates are expected to move higher depends on who you ask.

Central banks the world over are largely united in proclaiming that any sustained increase in inflation is unlikely before 2024.

The price increases we are seeing today and likely to see over the coming months, they say, are transitory. Essentially that means price rises are being driven by temporary bottlenecks in labour and materials caused by the pandemic just as demand begins to surge.

These bottlenecks can remain in place for months after economies start opening back up…temporarily driving up prices until they’re cleared.

The Australian government’s budget forecasts that the consumer price index (CPI) will come in around 2.25% by mid-2023. That figure is well within the RBA’s target range.

The RBA has a similar view, writing, “Despite the stronger outlook for output and the labour market, inflation and wages growth are expected to remain low, picking up only gradually.”

Industry commentary

Gareth Aird, head of Australian Economics at Commonwealth Bank of Australia (ASX: CBA) doesn’t believe wages growth is going to be quite that gradual.

According to Aird (quoted by Bloomberg):

If you’re trying to achieve higher wages and higher inflation, what you need is things like capacity utilisation at elevated levels, you need lots of skills shortages so that you’ve got a better chance of wages coming through. Everything looks like it’s moving in the right direction on that front.

Aird said “the forward-looking indicators of labour demand are as strong as we’ve seen them in a long, long time”. Hence, CBA’s expectations for wags and inflation “is running ahead of what the RBA is saying”.

Speaking of skills shortages in Australia, a labour crunch appears to be popping up. It is observable from the ski slopes to the beachfront coffee shops to the outback mines.

This excerpt from Bloomberg helps explain why:

Australians each year spend about A$20 billion… more abroad than international tourists do Down Under – money that’s now being spent locally as the border remains shut to keep out Covid-19. Also locked out are the around 15% of the labor supply in hospitality and food trades that are usually drawn from overseas workers.

Which ASX shares have the most to fear from higher rates?

The inflation and interest rate question really comes down to a matter of degree.

If inflation is within the RBA’s target range or even slightly above, any interest rate rises will likely remain subdued. Furthermore, this would occur without majorly impacting ASX shares.

But what if inflation begins to run hot following the past year’s unprecedented fiscal and monetary largesse? Then we could be in for some larger rate rises which will impact the ASX.

Though not all shares will feel the pain equally.

According to Wentworth Williamson fund manager James Williamson (quoted by the Australian Financial Review):

The higher-priced companies have dropped recently because you’re heading towards a world of interest rates heading off the lows. If you’re looking at a world where the cost of capital is rising, it’s terrible for these very high priced companies that don’t make a lot of money.

ASX banks shares are often pointed to as likely to do better in a world of rising rates. While ASX tech shares, more heavily dependent on future earnings, are generally expected to struggle. In particular if they are faced with a higher present cost of money.

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The Goodman Group (ASX: GMG) share price is out of form on Wednesday.

In afternoon trade, the integrated property company’s shares are down 1% to $19.32.

Why is the Goodman share price dropping?

Today’s weakness in the Goodman share price may have been driven by a broker note out of Goldman Sachs this morning.

According to the note, the broker has retained its sell rating but lifted its price target slightly to $13.31.

Based on the current Goodman share price, this implies potential downside of 31% for its shares over the next 12 months.

Why is Goldman bearish?

Goldman has been looking at the company’s valuation and particularly its Funds Management operations.

It commented: “We estimate that GMG’s current pricing values its Funds Management operations at 26% of its Mar-21 external AUM balance or 32x FY22E Management EBITDA. This compares to an average of 8% (or 20x FY22E fee-related EBITDA) for US-listed Alternative Asset Managers covered by GS. Relative to traditional fund managers and transactional evidence, GMG’s valuation premium is even more pronounced.”

And while the broker acknowledges that Logistics asset valuations remain strong, it still isn’t enough for Goldman.

“Pricing of Logistics assets remains strong (as demonstrated by recent transactions in the Australian market in particular). However, we estimate that the weighted average cap rate of both GMG’s AUM and its co-investments would need to tighten to just 2.5% (vs. 4.7% at Dec-20) in order for GMG’s current pricing (as a % of AUM) to be in line with the average price paid for Australian RE Fund Management groups in M&A transactions since 2010,” the broker said.

In light of this, it sees no reason to change its recommendations or valuation and has held firm with its sell rating.

Though, Goldman does admit that there is upside risk to its target price.

It explained: “Key upside risks to our TP and rating include: stronger investor demand for GMG-managed products than we allow for (impacting overall AUM growth rates); a more benign valuation decline than we assumed for Logistics assets globally; and stronger tenant demand for GMG’s development book than we allow for (impacting development margins, the rate of AUM growth, and overall NOI growth rates).”

Is anyone bullish?

Goldman Sachs may be bearish on the Goodman share price, but not everybody is.

Earlier this month, analysts at Citi put a buy rating and $22.10 price target on the company’s shares.

Based on the current Goodman share price, this implies potential upside of 14% over the next 12 months.

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The VEEM Ltd (ASX: VEE) share price has broken an all-time record today. At the time of writing, shares in the marine technology manufacturer are trading at $1.32 – up an incredible 14.78%.

The rise comes after the company announced the federal government has placed an order with it for $9 million worth of submarine refurbishments.

Let’s take a closer look at today’s news.

What’s affecting the VEEM share price?

In a statement to the ASX, VEEM says it has already received $3 million, and expects another $6 million, from government enterprise ASC Pty Ltd “in relation to the next full cycle docking for the Collins Class [submarine] maintenance program.”

VEEM says the contract is based on a “sophisticated scheduling approach” that takes into account uncertainties from COVID-19 and future metals prices.

The company claims this will provide more certainty to ASC and allow VEEM to better forward plan. Work will begin within the next financial year with the first deliverables due by July 2022.

The order is similar to one ASC placed with the company in March 2020 – also for $9 million. The VEEM share price increased 5.4% on that day.

Management commentary

VEEM managing director Mark Miocevich said of today’s news:

The new order from ASC is further demonstration of our reputation for precision engineering to the exacting defence standards of the Royal Australian Navy. This order will provide certainty to our planning and positively impact our profitability in the 2022 and 2023 financial years.

VEEM share price snapshot

Over the past 12 months, the VEEM share price has risen by around 217%. Unlike many other ASX companies, VEEM did not experience significant financial shock relating to the pandemic. So arguably, the increase in its share price could be attributed to genuine business growth rather than a rebound from the COVID-driven market sell-off.

While servicing the defence industry is an important segment of VEEM’s business, it is not the only one. The company’s value shot up by around 7% in March after it announced partnerships with Italian superyacht builders.

VEEM has a market capitalisation of around $168 million.

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The S&P/ASX 200 (ASX: XJO) started off the day with a surge, up 0.28% to 7,134.1 points, just shy of the all-time high 7,172 the index reached earlier this month. At the time of writing it has pulled back and is sitting down 0.01% at 7,112.6. One sector is standing out amongst the rest: ASX gold shares.

Gold miners are on fire today, contributing two of the day’s top ASX 200 performers in Silver Lake Resources Limited. (ASX: SLR) and Regis Resources Limited (ASX: RRL). Silver Lake shares are up a healthy 2.81% today to $2.02 a share, while Regis shares are up 4.71% to $2.67 a share. But it’s not just these two companies. Most ASX gold shares are in the sun today. The largest ASX gold miner in Newcrest Mining Ltd (ASX: NCM) is up 2.15% to $29.01. Its slightly smaller rival in Northern Star Resources Ltd (ASX: NST) is up 3.27% to $11.68. I’m sure you’re sensing a theme here. 

So why are gold miners shining on the market today? These increases are more than what the broader index saw this morning, by quite a bit. 

Gold price pushes up ASX gold miners

Like all mining companies their market valuation is primarily the price of the commodity they mine. Miners have relatively fixed costs. As such, any move in the underlying gold price has the potential to exponentially increase the company’s profitability. If it costs US$1,000 to extract an ounce of gold, and the price of gold rises from US$1,500 to US$2,000 an ounce, the miner’s profitability doubles from US$500 to US$1,000 an ounce, even though gold has only appreciated 33.3%.

Gold has indeed been on an upward climb for a few months now. Just in the past 24 hours, gold has climbed above US$1,900 for the first time since early January. Back in March gold had dropped under US$1,700 an ounce, so this is some substantial pricing appreciation. Around 12% over the past two months, to be precise. 

That’s why we have seen ASX gold miners appreciate in value. Today’s move upwards is just the latest chapter.

Are safe havens back in vogue?

It’s interesting to see investors slowly climb back into gold. The yellow metal is a traditional safe haven asset, meaning investors like to buy it when there is a lot of uncertainty or fear going around.

Back in March every other asset, whether it was ASX shares, US shares, cryptocurrencies or property, seemed to be going up. But in the past month or two we have seen a substantial sell-off in some ASX shares, especially those in the tech sector. Inflation fears are largely to blame. We have also seen renewed volatility in the crypto space. These market gyrations might be reminding investors that a safe haven might not be such a bad thing for their portfolios right now. 

As such, gold, and by extension, gold miners, seems to be back in vogue to some degree. All of these factors could be contributing to the performance we’re seeing today from ASX gold mining shares. 

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Shares in Archer Materials Ltd (ASX: AXE) are rising after today. This comes after the company updated the market on its 12CQ quantum computing processor chip’s development. At the time of writing, the Archer share price is 5.26% higher than yesterday’s close. Shares in the tech company are currently swapping hands for 80 cents.

According to Archer, the 12CQ chip is a first-of-its-kind quantum bit processor technology.

A quantum bit is a single unit of quantum information. Quantum computing is a method of computing focused on the principles of quantum theory. Furthermore, it aims to explain the behaviour of matter and energy.

Archer hopes its 12CQ chip will enable quantum computing devices to be used in mobile and data-centric applications.

Let’s take a closer look at the news driving the Archer Materials share price today.

Quantum computing algorithms

Archer is working with Australian artificial intelligence (AI) and quantum computing business, Max Kelsen. The purpose of the partnership is to create algorithms to run the 12CQ chip in the AI technology field. Therefore, the development of algorithms is needed to link the chip to the applications a customer would use it for.

Archer and Max Kelsen are working towards what Archer calls a “unique class” of quantum algorithms. These quantum algorithms will be used in the training of quantum neural networks.

According to Archer, quantum neural networks are essential to AI technology and have the potential to allow quantum computers to outperform modern computers in some tasks.

The company also states that its early results show significant improvements in algorithmic performance can be achieved.

Archer and Max Kelsen are still continuing to build the algorithm. They aim to make it publicly available on Qiskit – an open-source quantum computing platform – later this year.

Commentary from management

Archer’s CEO Dr Mohammad Choucair commented on the news, saying:

There are parallels between the business growth strategies of quantum computing companies today and the computing companies of the 1980s that have since come to dominate global tech.

Hardware and software firms working together at an early stage of technology development is a well-known recipe for success in the computing industry.

At Archer, we are working with global leaders in computing and AIto develop and integrate the software required to enable the operation of our 12CQ chip and its proposed high impact enduse applications.

Archer Materials share price snapshot

The Archer Materials share price is having a brilliant year on the ASX so far.

It’s currently 53% higher than it was at the start of 2021. It’s also gained 11% since this time last year.

The company has a market capitalisation of around $171 million, with approximately 226 million shares outstanding.

More reading

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Whispir Ltd (ASX: WSP) shares are having a bumper day on Wednesday. At the time of writing, the Whispir share price is trading 9.2% higher at $2.73.

This comes after an article was published last night on The Australian website that discussed Whispir and a potential partnership with Chemist Warehouse

Why is the Whispir share price in focus?

The Whispir share price is on the rise today despite no official news from the communications technology company.

But, according to The Australian, Chemist Warehouse is reportedly set to link with Whispir as it looks to roll out an e-prescription service. Following the federal government’s funding of telehealth services as a result of the pandemic, the article reported on the increasing demand for contactless medical services.

Whispir chief executive Jeromy Wells was cited by the article explaining how electronic prescriptions would work. According to Wells, prescriptions could be forwarded and fulfilled by pharmacists via Whispir’s automated SMS service. As a result, the Whispir platform could potentially manage all incoming e-prescription requests.

Mr Wells was also quoted as saying, “In terms of it being material in terms of revenue, it’s not insubstantial but it would be impolite to talk about numbers.” He did, however, go on to highlight the additional awareness such a deal could deliver for the Whispir platform.

Whilst the company has not updated the market regarding any deals with the pharmacy chain, investors are driving up the Whispir share price today regardless. Motley Fool has contacted Whispir for comment.

More on the Whispir share price

Whispir is a software-as-a-service (SaaS) communications workflow platform provider. According to the company, its industry-leading software platform allows organisations to deliver services using automated and multi-channel communication workflows. Whispir has more than 750 clients with notable customers including AGL Energy Limited (ASX: AGL), BP, ING and KPMG.

Despite a strong start to 2021, the Whispir share price is now down by around 25% this year. In late April, the company released a promising update for the third quarter highlighting annualised recurring revenue (ARR) of $50.3 million. Despite this, Whispir shares finished that day lower.

Earlier this year, Whispir also successfully completed an institutional placement. The company managed to raise $45.3 million at $3.75 per share with the intention of accelerating its growth strategy in its three key markets of Australia and New Zealand (ANZ), Asia, and North America.

Based on the current Whispir share price, the company commands a market capitalisation of around $317 million.

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In afternoon trade the S&P/ASX 200 Index (ASX: XJO) has given back its morning gains and is edging lower. The benchmark index is down slightly to 7,111.4 points.

Four ASX shares that are falling more than most today are listed below. Here’s why they are sinking:

Kogan.com Ltd (ASX: KGN)

The Kogan share price is down 6% to $10.02. This is despite there being no news out of the ecommerce company today. However, prior to today, the Kogan share price was up 21% since the end of last week. This may have led to some investors deciding to take a bit of profit off the table. Kogan’s shares were sold off last week after another disappointing update.

MyState Limited (ASX: MYS)

The MyState share price is down 2.5% to $4.73. This follows the successful completion of the institutional component of its ~$80 million equity raising. The diversified financial services company raised a total of approximately $31.3 million from institutional investors at an 11.3% discount of $4.30 per new share. It will now seek to raise the balance via a retail entitlement offer at the same price.

Regional Express Holdings Ltd (ASX: REX)

The Regional Express share price has fallen 3% to $1.26. A number of travel shares have been under pressure today amid another rise in COVID-19 cases in Melbourne. This has led to a number of border restrictions being announced. There are concerns that if it gets out of control, it could derail the travel market recovery.

Strike Energy Ltd (ASX: STX)

The Strike Energy share price is down 4% to 31.7 cents. This follows the release of another update on its West Erregulla operation. While the company is making progress with its drilling, it also revealed that additional flow testing and de-sanding equipment will be required. Procurement processes are underway.

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Brokers have been perusing the ASX share market for opportunities that pay relatively high dividend yields to shareholders. These ASX dividend shares may be opportunities. 

Some businesses have high dividend payout ratios, which can lead to higher dividend yields.

Janus Henderson Group (ASX: JHG)

Janus Henderson is a large, multi-national asset manager. It has more than US$500 billion of assets under management (AUM) and hundreds of investment professionals.

The brokers at Macquarie Group Ltd (ASX: MQG) rate the Janus Henderson business as a buy, with a price target of $56 for the next 12 months. That means there’s a potential upside of around 15%.

Janus Henderson reports its progress to investors each quarter. In the first quarter of 2021 to 31 March 2021, it said that its AUM increased by 1% to US$405.1 billion compared the prior quarter reflecting positive markets partially offset by net outflows of US$3.3 billion. However, Macquarie noted this was on the back of a strong prior quarter of inflows.

The fund manager noted that it is seeing “solid” long-term investment performance, with 62% and 70% of AUM outperforming relevant benchmarks over a three-year and five-year basis, respectively, at the end of the quarter.

Year on year, quarterly earnings per share (EPS) increased 52% to US$0.91. This funded a 6% increase in the quarterly cash dividend for the ASX dividend share to US$0.38 per share.

Based on Macquarie’s numbers, Janus Henderson is valued at 10x FY21’s estimated earnings with a projected dividend yield of 4.25%.  

HomeCo Daily Needs REIT (ASX: HDN)

This is an Australian real estate investment trust (REIT) that invests in metro-located, convenience based assets across target sub-sectors of ‘neighbourhood retail’, ‘large format retail’ and ‘health & services’.

Morgans rates the ASX dividend share as a buy with a price target of $1.50 over the next 12 months. In FY22 it’s expecting a distribution of 8 cents per unit, which translates to a distribution yield of 5.9%.

The REIT’s portfolio has been built towards a focus of non-discretionary retail which is designed to provide exposure to defensive and sustainable income streams. Future growth potential is created through organic rental growth and acquisitions. The weighted average lease expiry (WALE) is over nine years.

HomeCo Daily Needs REIT is using the acquisition strategy to improve its scale. Last month it announced that it was acquiring seven large format retail assets for a total purchase price of $266.4 million, with a weighted average capitalisation rate of 6.75%. That acquisition was at a 6% discount to the independent valuations for FY21.

It also announced that it was acquiring the Armstrong Creek Town Centre for $55.6 million, representing a 6% capitalisation rate. It’s a newly completed Coles Group Ltd (ASX: COL) anchored neighbourhood centre which opened for trade in September 2020.

In FY21, it’s expecting to make funds from operations (FFO) per unit of at least 8.3 cents. That’s an increase of 24% compared to the FY21 PDS FFO of 6.7 cents per unit.

The ASX dividend share said that it has significant debt capacity to make further accretive acquisitions.

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