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 24.7% per annum since inception in June 2017, which is superior to the S&P/ASX Small Ordinaries Accumulation Index average return of 10.5%.
These are the two small cap ASX shares that WAM outlined in its most recent monthly update:
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Atomos Ltd (ASX: AMS)
Atomos is a business that provides digital imaging creation tools for video professionals. WAM explained that Atomos now creates 4K and HD Apple ProRes monitor-recorders, using by video professionals for content creation with lower production costs.
The fund manager pointed to its strongest six months in history, with $32.8 million in sales and $3 million of earnings before interest, tax, depreciation and amortisation (EBITDA) – this was a 210% increase year on year.
WAM was also impressed by the significant cash flow improvement which was growth of 133% to $4.3 million.
The fund manager said that the small cap ASX share has benefited from the large increase in video usage and production during the COVID-19 pandemic across the world.
Atomos is well placed to scale with $23.3 million of cash on its balance sheet and access to an undrawn $5 million working capital facility, according to WAM Microcap.
Universal Store Holdings Ltd (ASX: UNI)
The fund manager also likes Universal store, which was only listed a few months ago.
Universal Store has 65 casual apparel stores across Australia and New Zealand. Its main target audience is the 16 to 35 year old age bracket.
WAM explained that Universal Store sells a selected range of third party branded products – this makes up around 70% of revenue, it also has a range of private label products.
Just like plenty of other businesses, particularly in the retail space, Universal Store reported a record six month result in its FY21 half-year report. It made $31.5 million of underlying earnings before interest and tax (EBIT) – this was growth of 69%. This beat the guidance that was given in January 2021 of a range of $30 million to $31 million.
A key part of that growth was the online sales, which grew by 128% and represented 12% of the overall total thanks to options like 'ship from store' and click and collect.
With the company making a record result, it decided to repay its jobkeeper payments of $3 million.
In the second half of FY21, the small cap ASX share is expecting to open three new stores. It's looking to open more than 100 stores over time.
WAM Microcap is positive on the outlook for growth. It has a good net cash balance sheet of $22.5 million, with plans for expanding its private label brands and a disciplined pricing and promotional strategy.
