2 small-cap ASX shares this fund manager is excited about

Fund manager Wilson Asset Management (WAM) has identified two top small-cap ASX shares in one of its portfolios that could be investment ideas.

WAM operates several listed investment companies (LICs). Some, such as WAM Leaders Ltd (ASX: WLE) and WAM Capital Limited (ASX: WAM), focus on larger companies.

Another is WAM Microcap Limited (ASX: WMI). It focuses on small-cap ASX shares with a market capitalisation of 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 fund manager outlined these two small-cap ASX shares in its recent monthly update.

Tuas Ltd (ASX: TUA)

WAM described Tuas as a “disruptive mobile services provider” in Singapore spun out of the TPG Telecom Ltd (ASX: TPG) group of companies after TPG and Vodafone Australia merged in June 2020.

The fund manager pointed out that in the company’s FY23 half-year result, Tuas revealed a “strong improvement” in financial metrics. This signalled to investors that rising subscriber numbers and improving operating leverage were “continuing to drive revenue growth”.

WAM’s investment team believe that the small-cap ASX share, founded and led by David Teoh, will “continue to rapidly gain market share” from existing market players and grow into new areas such as broadband and corporate.

Summarising the thoughts about why the business could be undervalued, the investment team explained:

We believe the market is underestimating the potential cash generation of Tuas following a heavy period of investment into its 5G network in Singapore over the past two years.

Synlait Milk Ltd (ASX: SM1)

The investment team described Synlait Milk as New Zealand’s fourth-largest milk processor. It’s a business-to-business supplier of dairy ingredients, infant formula products and lactoferrin.

The fund manager said an update released in March regarding the company’s FY23 net profit after tax (NPAT) guidance range advised it would take an additional year to complete its financial recovery plan.

WAM said Synlait’s longer-than-expected financial recovery was “largely due to supply chain disruptions, operational challenges and inflationary cost pressures”. This led to a decline of around 30%.

The investment team explained its optimistic outlook for the small-cap ASX share, saying:

Despite these setbacks, we are confident that Synlait Milk can deliver on their revised earnings forecast with signs that exports are returning to normal and the operating environment and systems are improving.