I think small-cap ASX shares can deliver the biggest returns because of where they are in their growth journey and the current share prices.
Higher interest rates seem to have hurt the valuations of the smaller end of the ASX compared to the biggest S&P/ASX 200 Index (ASX: XJO) shares.
I’m looking at the below two businesses as much-cheaper ideas which are delivering underlying operational growth that can help increase their value over time.
Beacon Lighting Group Ltd (ASX: BLX)
Beacon Lighting describes itself as a leading provider of lighting, fans and electrical accessories, servicing both retail and trade customers in Australia. It has several other specialty lighting brands addressing separate market segments in Australia.
Australian lighting demand may move up and down over time, but I think the current pessimism about the sector means it’s a good time to look at it – the Beacon Lighting share price has dropped 37% this year. If it fell further I’d say it has even more room to bounce back when conditions normalise.
A key reason why I’m excited about the ASX small cap share is its international division where it’s an “emerging wholesaler” of fan and lighting products with sales and support offices in Hong Kong, USA, Germany and China.
In the FY23 first-half result, Beacon’s international sales in Europe and Hong Kong increased by 54.6% and 10.8% respectively. International US sales to US showrooms increased by 65.4%. There was sales growth of over 200% in the Tmall Global channel in China.
By 2030, the international division could be much bigger and I think this will drive the underlying value much higher as those international sales compound to much more meaningful numbers.
Bailador Technology Investments Ltd (ASX: BTI)
Bailador is a tech-investing company that looks to invest in private businesses that are growing quickly, have international revenue generation, a “huge” market opportunity and have the ability to generate repeat revenue.
The ASX small-cap share is currently invested in eight tech businesses including (in weighting order) Siteminder Ltd (ASX: SDR), InstantScripts, Rezdy, Access Telehealth and Rosterfy. These are all promising digital businesses that are demonstrating impressive revenue growth.
In the latest quarterly update, Siteminder said its revenue had grown by 28.7%. An update in March said that InstantScript’s revenue was growing at 100% year over year.
According to Bailador, its shareholder return over the three years to May 2023, was 15.3% per annum.
At the current Bailador share price, it’s valued at a 27% discount to the pre-tax net asset value (NAV) at May 2023. I think it’s priced at a very good level for long-term outperformance, and investors can receive attractive dividends each year to 2030 with the company committed to paying a dividend yield of 4% of its pre-tax NTA. At the current NTA discount, that represents a fully franked dividend yield of 5.5%.
