Here are two ASX small caps that could be set for a re-rating

What is a stock you like (that most) people haven’t heard of?

We have invested in a small business called Urbanise.com, which has a market capitalisation of around $27 million. It’s a B2B property technology business with a software platform that has two interrelated offerings for different industries – strata managers and facilities managers (think aged care facilities or anything with large property portfolios).

We like the business for a number of reasons, not least of which is because Australia’s strata market is not only large (2.8 million lots) but is one that will continue to grow, especially as higher density housing will be required to keep up with population growth.

Urbanise’s software platform is market leading and is the only purely cloud-based system of scale. The main competitors are very “old world” software systems, which gives the company a competitive advantage in a market that is ripe for disruption.

Urbanise is a small business, but its revenue is highly recurring in nature, with very little churn. If revenue growth rates increase, we believe it can lead to a significant re-rating as the market begins to understand the opportunity in strata management and the disruption that may occur.

What’s your take on small caps in the current economic environment?

In my 17 years of investing in Australian emerging companies, the last 12 months has been by far and away the hardest market – not just to try to invest in but also to try and rationalise.

People typically invest in these stocks because of their growth profile, however in today’s environment the risks are clearly outweighing the potential returns. Despite this, history has shown us that this is often the best time to allocate capital.

I believe this is the case even though the next six months may well yield some poor operating results. Equity markets tend to look three to six months ahead, so now is arguably the time when investors should be considering which emerging companies to invest in.

Which stock in your fund is the most undervalued by the market?

Many of our investments are trading on price-to-earnings multiples of less than 10 times, but if I were to pick just one, it would be Big River Industries.

The 100-year-old business is one of the last remaining building materials-related businesses that is still listed on the ASX after others like CSR have been acquired.

BRI is a nationwide distributor of building materials with a particular focus on high-value timber panel products. While the macro backdrop is not ideal, given Australia’s very severe housing shortage we expect BRI will be a major beneficiary as this issue is addressed.

The company has been executing on a consolidation strategy, which has many years of runway in an industry dominated by Baby Boomer business owners. In our opinion, there is no reason to think that BRI could not double its earnings per share by FY27.

Have you made any recent changes to your fund?

Our strategy has a very long-term focus and is highly concentrated, with up to 15 investments. We often take large stakes – between 10 per cent to 30 per cent – and over time, if it’s in the interest of shareholders, we may seek board representation.

At present, we are on the board of six of our listed investments and two of our unlisted investments, which allows us to support these businesses in an active way and ensure that shareholder capital is respected but, at the same time, doesn’t restrict a business’ growth prospects,

What’s your favourite local bar or restaurant and your go-to order?

With three kids under the age of seven it’s generally the local pub if we are lucky! Otherwise, when we get the rare occasion to dine without the kids it’s The Dry Dock in Balmain, which recently opened – and we order the rib eye on the bone to share.

Any podcasts or TV shows that you’d recommend?

I am a big fan of the TV series Where The Wild Men Are, which sees Ben Fogle stay with a person or family who have moved to an entirely different continent and/or off grid.

As for podcasts, Guy Raz’s How I Built This series is always a great listen, particularly the James Dyson and Yvon Chouinard episodes. Both of these individuals are truly remarkable founders.

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Source: Australian Financial Review