Respected fund manager Wilson Asset Management (WAM) has recently identified two small cap ASX shares that it owns in its portfolio.
WAM operates several listed investment companies (LICs). Some focus on larger companies like WAM Leaders Ltd (ASX: WLE) and WAM Capital Limited (ASX: WAM).
There's also one called WAM Microcap Limited (ASX: WMI) which targets small cap ASX shares with a market capitalisation under $300 million at the time of acquisition.
WAM says WAM Microcap targets the most exciting undervalued growth opportunities in the Australian microcap market.
The WAM Microcap portfolio has delivered gross returns (that's before fees, expenses and taxes) of 23.8% per annum since inception in June 2017, which is superior to the S&P/ASX Small Ordinaries Accumulation Index average return of 10.6%.
These are the two small cap ASX shares that WAM outlined in its most recent monthly update:
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Dusk Group Ltd (ASX: DSK)
WAM Microcap said that Dusk was one of the significant contributors to the investment portfolio performance during December 2020.
The fund manager described Dusk as Australia's leading retailer on home fragrance products such as candles, diffusers and essential oils through its 115 owned and operated stores across Australia and online.
In a December trading update, the small cap ASX share provided sales guidance for the first half of FY21 of between $90 million to $90.5 million, up from $58.7 million in the first half of FY20.
Its earnings before interest and tax (EBIT) guidance for the FY21 first half was between $26 million to $27 million, up from $9.7 million in the prior corresponding period.
During the coronavirus pandemic, WAM Microcap said that Dusk has benefitted from consumers spending more time at home which has increased demand for comfort-related products. The company estimates net cash at the end of December of approximately $33.5 million. The fundie continues to see a positive outlook for the company driven by the roll out of new stores across Australia.
Sovereign Cloud Holdings Ltd (ASX: SOV)
This business trades as AUCloud and was listed in December 2020. WAM Microcap described the small cap ASX share as an infrastructure as a service (IaaS) company supporting the secure and continuous delivery of information to the Australian government, the Australian Defence Force (ADF) and 'critical national industry' communities.
WAM Microcap invested in AUCloud through a pre-initial public offering investment, as part of the strategy implemented following the WAM Microcap capital raising in August 2020.
The fund manager said that AUCloud has a successful partner channel with a number of the largest global software companies and a strong market opportunity, with the company estimating the Australian government will spend in excess of $13 billion per year on information and communications technology through to 2030.
According to WAM Microcap, the small cap ASX share is well positioned to capitaliise on the investment initiatives as a direct provider of IaaS services and through a channel partner selling into the Australian government or ADF. The AUCloud share price rose more than 50% on its first day of trading.
