The fund manager in charge of Spheria Emerging Companies Ltd (ASX: SEC) has revealed some of the ASX shares that it thinks look like good ideas at the moment.

Spheria's investment philosophy is to buy companies with cash generative business models, with a demonstrated track record of solid returns at a sensible valuation given their industry dynamics and positioning.

Whilst Spheria believes that the world can overcome COVID-19, the threat of inflation and emerging signs of reluctance by central banks to "pump prime" to the same extent as they have since the emergence of COVID-19 means the fund manager is focusing its efforts on finding business models with pricing power and trying to avoid those that are likely to see unexpected compression in profit margins, such as mining contractors.

In this era of high levels of corporate activity with lots of liquidity, "procyclical" boards and record levels of private equity funding, Spheria thinks it's well placed to benefit. That's because of its focus on undervalued, cash-generating businesses with decent balance sheets.

Spheria is avoiding ASX shares that are overvalued and it's trying to maximise the risk-reward equation for investors with a disciplined investment approach that is predominately guided by valuation fundamentals.

Ainsworth Game Technology Limited (ASX: AGI)

Ainsworth is a gaming machine manufacturer and supplier. It offers the types of machines that you may find in casinos.

Spheria noted that whilst the company has been heavily impacted by COVID-19, it has never been in danger of insolvency because of property holdings in the US that at one point exceeded its market capitalisation.

The fund manager pointed out that in the US (and Australia), the end market of casinos, pubs and clubs have/had recovered strongly and in many case are now/were in a position to recommence expenditure on new machines. The company returned to profitability in the second half of FY21.

Spheria believes that the ASX share has the potential to leverage its portfolio and intellectual property and regulatory approval to improve earnings and surpass what it was making before COVID-19 came along.

City Chic Collective Ltd (ASX: CCX)

This ASX share is a retailer of plus-size clothes, footwear and accessories. It has a number of different brands including City Chic, CCX, Avenue and Evans. City Chic is now making a majority of its sales online.

Spheria said this business appears to be well positioned to benefit from the re-opening across the countries that it has major operations in (mainly the UK, the US and Australia). It can also benefit from the significant bounce back in apparel expenditure, which has been hurt by lockdowns in the UK and US in-particular, that is accompanying this trend.

According to Commsec, the City Chic share price is valued at 31x FY23's estimated earnings.

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Spheria Asset Management has identified two ASX shares that it believes could be good value.

The listed investment company (LIC) Spheria Emerging Companies Ltd (ASX: SEC) releases a monthly update and tells investors about which shares have performed well and shares some comments about them.

These two ASX shares are ones that were included in the latest update:

Monadelphous Group Limited (ASX: MND)

Monadelphous is one of the largest Australian engineering groups providing construction, maintenance and industrial service to the resources, energy and infrastructure sectors. It's involved in some of Australia's biggest and most complex projects and facilities.

Spheria said that the engineering business was the largest contributor to its performance over April 2021 after rising 23%.

The fund manager attributed some of the increase to the fact that it had successfully settle a large claim from Rio Tinto Limited (ASX: RIO) after a fire at the Cape Lambert iron ore processing plant that Monadelphous was providing maintenance operations on.

Monadelphous said it highly values its long-term business relationship with Rio Tinto, is pleased that this matter has been resolved amicably, and is looking forward to continuing to work closely with this very important customer into the future.

At the time of the update, Spheria said that Monadelphous still screened very cheaply to the fund manager. It estimates that it was valued at around 10.5x FY22's the enterprise value to earnings before interest and tax (EBIT) (EV/EBIT). Spheria also said that Monadelphous is sitting on a net cash balance sheet of over $200 million by year end.

Universal Store Holdings Ltd (ASX: UNI)

Universal Store is a specialty retailer of youth casual apparel that operates 65 physical stores across Australia as well as an online store.

It aims to offer a frequently changing and carefully curated selection of on-trend apparel products to a target 16-35 year old fashion focused customer.

Spheria said that Universal Store's recent share price performance came after reporting an exceptionally strong third quarter trading update with like for like store sales up 27.5% and online sales growth of 148.2%.

The fund manager pointed out that Universal Store has been growing strongly for a while but it's still going from strength to strength.

Spheria believed that Universal Store was valued at 11x FY22's EV/EBIT. It still screened attractively to the fund manager because of its "exceptional" return on invested capital (ROIC) and strong growth prospects through store rollout and online growth.

In the trading update, the business said that it's seeing its customers resume more aspects of their social lives with CBDs continuing to recover along with a return to domestic tourism (including New Zealand).

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Spheria Emerging Companies Ltd (ASX: SEC) has identified a few ASX shares that it believes are opportunities at the moment.

What is Spheria Emerging Companies?

This is a listed investment company (LIC) that is managed by Spheria Asset Management.

It tries to look at the smaller end of the market for opportunities to beat the market.

Spheria Emerging Companies has been successful with that goal. Over the last year the LIC's net portfolio performance has been a return of 29.8%, outperforming the S&P/ASX Small Ordinaries Accumulation Index's return of 17.2%. Since inception in November 2017, the net return has been 9.1% per annum – superior to the benchmark return of 7.4% per annum.

The LIC owns a number of interesting ASX shares in its portfolio such as Fletcher Building Limited (ASX: FBU), HT&E Ltd (ASX: HT1), Blackmores Limited (ASX: BKL), Healius Ltd (ASX: HLS), Adbri Ltd (ASX: ABC) and Class Ltd (ASX: CL1).

These are manager's latest thoughts on some ASX shares it thinks are opportunities:

Seven West Media Ltd (ASX: SWM)

Seven West was the largest contributor to the Spheria Emerging Companies portfolio in February. Spheria said this was thanks to reporting a result that was well ahead of market expectations as television advertising returned to growth during the fourth quarter of the 2020 calendar year. Costs were better that expected and the balance sheet was improved.

A deal about news with Google will also add to revenue and profit. Spheria believes that stronger viewer numbers should help increase revenue and potential news about the divestment of studios and/or towers may also help.

Despite the strong share price movement recently, Spheria said that the Seven West valuation is on a cheaper valuation multiple compared to its nearest listed peer.

Corporate Travel Management Ltd (ASX: CTD)

Corporate Travel was another strong performer last month. Spheria pointed to the "respectable" result, low cash burn and increasing market share as reasons to be positive. The acquisition of the US business Travel & Transport was also a factor.

The LIC believes that Corporate Travel Management is positioned to return to good profitability once the western world emerges from travel restrictions due to COVID-19. The ASX share still has many months of liquidity at the current cash burn rate.

Vista Group International Ltd (ASX: VGL)

Vista was another holding that returned over 20% during the month.

Spheria explained that Vista dominates the market for software in the global cinema exhibition, distribution and production markets.

Vista has been hit hard by the COVID-19 pandemic because of the amount of cinemas that have been closed over the past year. However, the ASX share has been able to keep the cash burn to a low level, according to the fund manager. It still has 20 months of liquidity left at the current burn rate, which should improve as vaccines are rolled out in markets like North America, Europe and the UK.

The thinking behind the LIC's choice of Vista is that it believes it's well placed to return to strong levels of profitability as the pandemic wanes. At around 2.5x historical revenue, Spheria believes the business is undervalued if it can return to prior levels of earnings.

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Why is cash flow important?

Spheria Asset Management's Portfolio Manager, Marcus Burns, explained the importance of cash flow when looking at small caps.

He commented: "When it comes to investing in small caps, too many investors ignore cash flow, but when it comes to small caps, cash is king."

"Key to our investment process is buying businesses that generate predictable free cash flows at an appropriate multiple for the forecast growth profile. By default, this lends itself to screening out companies that don't generate cash, lack sustainability or are being priced nonsensically by the market."

"The cash-flow conversion rate is a key metric in this process, and we believe it's one of the most important characteristics for enduring small-cap returns."

Given that the Spheria Australian Smaller Companies Fund has returned 33.9% (net of fees) in the six months to January 31, it certainly pays to listen to what Spheria says.

Why ASX shares does Spheria like?

The three small cap cash flow kings that Spheria likes are listed below. Here's what it has to say about them:

A2B Australia Ltd (ASX: A2B)

The first cash flow king is A2B Australia, formerly known as Cabcharge. Mr Burns explained:

"The COVID-19 outbreak has hurt sentiment towards the business given reduced taxi usage from ongoing restrictions. While the company's short-term performance in its core mobility business is likely to remain patchy the balance sheet is more than strong enough to see A2B through ($24m net cash).

"The company has also begun to articulate a measured strategy to grow its payments business into the non-taxi space in Australia and its mobility platform solutions business globally. We believe the market continues to discount an overly bearish outcome on the core mobility business let alone any success on the latter two growth opportunities.

"A2B's fundamentals are incredibly strong – its long-term rate of cash flow conversions sits at 84%, it has net cash of around $24m, yet trades on an EV/EBIT multiple of around 4x."

Monadelphous Group Limited (ASX: MND)

Another cash flow king according to Spheria is this global engineering company. The portfolio manager commented:

"What's important about this construction engineering company is that it has two divisions, one is an engineering division where it builds something once-off, the second is a maintenance division.

"We believe the maintenance division is the company's most lucrative division and it has been growing to now account for around 63% of the business.

"Monadelphous has a long-term cash flow conversion rate of 112%. It trades on around 11x EBIT, has around $200m of cash on the balance sheet and we think it presents incredibly good value especially now that the business mix has improved over time. Monadelphous stands to benefit from the improved sentiment and exploration activity in the resources sector."

Mortgage Choice Limited (ASX: MOC)

Finally, Mr Burns feels that mortgage and home loan broker, Mortgage Choice, is another cash flow king for ASX investors to look at. He explained:

"During December, MOC was one of our microcap fund's largest contributors, clocking a 20% return. We were genuinely perplexed why the stock remained so cheap after posting a robust FY20 result. Since the day of that announcement, it has returned an additional 71% showing how microcaps share price performance can sometimes badly lag the fundamentals.

"The company still only trades on a PE of 10x with net cash of $6m and a highly attractive dividend yield of +8% (fully franked) that is underpinned by a $54bn loan book."

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There are some fund managers out there that have positive or bullish thoughts about some ASX shares.

Spheria Emerging Companies Ltd (ASX: SEC) is one of the listed funds on the ASX, it recently shared some thoughts about some of the positions in its portfolio.

Spheria's portfolio has outperformed its benchmark by more than 10% over the last six months.

These are two of the ASX shares that it talked about:

Fletcher Building Limited (ASX: FBU)

Fletcher Building was the largest position in the Spheria portfolio at the end of November 2020. It made up 4.3% of the portfolio.

This company is a diversified construction business. It makes building products including insulation and cement. Fletcher Building also operates retail businesses that sells those products and others to tradespeople across the Tasman. The company also builds homes, buildings and infrastructure.

Spheria said that Fletcher Building was the lead contributor to the portfolio, gaining 39% during the month on the back of a strong trading update for the first four months of the year followed by a strong profit guidance increase towards the end of the month.

In the first four months it saw revenue up slightly by 1%, with earnings before interest and tax (EBIT) growing by $80 million to $227 million. The EBIT margin rose by 2.9 percentage points to 8.4% because of the improved operating efficiency. In the first half of FY21, Fletcher Building is expecting EBIT to be in the range of $305 million to $320 million, up from $219 million in the prior corresponding period.

The fundie explained that Fletcher Building is seeing the benefit of a recovering housing market in both Australia and New Zealand plus the benefits of streamlining its operations over the recent housing downturns. Since the sale of the Formica division around two years ago, the Fletcher Building balance sheet has been lowly geared, putting the business in a good position for a re-bound according to Spheria.

Fletcher Building also said recently that the board expects the company will resume dividend payments in FY21.

A2B Australia Ltd (ASX: A2B)

A2B was another performer for the Spheria portfolio in November, rising by 37%.

It's the business behind Cabcharge, Silver Service, 13cabs and other brands. Cabcharge allows passengers and drivers access to fast and secure cashless payment methods. Silver Service is a premium taxi service. 13cabs provides the booking service platform, it trains drivers and helps them obtain a taxi licence, buying a vehicle and it also helps with insurance.

Spheria said that the ASX share is perceived as being a beneficiary of social movement. Having Melbourne emerge from lockdown has clearly helped the short-term outlook for A2B. The fund manager believes the company is misperceived on many levels.

The first misconception, according to the fundie, is that it's suffering major disruption from ridesharing companies. It thinks this is an incorrect view because ridesharing has grown the overall personal transport market, it hasn't dramatically reduced the number of cab trips being taken.

The fund manager believes the second major misperception is that the company doesn't have any growth potential. Spheria pointed that A2B has been heavily re-investing into payments and cab-hailing technology.

The ASX share's present valuation is still incredibly supportive and the outlook for the business both here and internationally has hardly been stronger. Despite the re-rating over the month, the fundie believes A2B is still only trading on an enterprise value / EBIT ratio of 7 times.

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