3 ASX small-cap shares I think have explosive growth potential
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Investing in smaller companies, often called small-cap shares, is quite exciting for many investors. These companies, usually valued between $200 million and $2 billion, have a great potential to grow quickly.
What attracts people to ASX small-cap shares is their ability to respond quickly to new opportunities or changes in the market. This agility can lead to rapid growth. However, remember that while the opportunity for big rewards exists, these stocks can also be quite volatile. Investing in them comes with a mix of high hopes and risks.
With that caveat, let's dive into 3 ASX small-cap shares that I think have promising growth potential.
PWR Holdings (ASX: PWH)
PWR Holdings is a great example of a company using its strong skills in one area to grow into other industries.
Founded in 1997 by Kees Weel, who is still the CEO today, PWR Holdings has become a top player in advanced cooling systems. The company is a global leader in this niche, providing high-performance products for motorsport, automotive, aerospace, and defence industries.
While the company is best known for its motorsports division, the aerospace and defence industry is growing fast.
In 1H FY24, the company reported robust results, as revenue grew by 22.2% to $64.2 billion, and earnings before interest, taxes, depreciation, and amortisation (EBITDA) increased by 27.2% to $18.4 billion. While the motorsport sector's 19% revenue growth was solid, the real surprise came from the aerospace and defence sector which saw an impressive 124% growth in revenue. The sector represented 12% of the total revenue, up from 7% a year ago.
Over the past decade, PWR Holdings has delivered stable earnings growth, superior profitability, and high return-on-equity ratios.
The PWR Holdings share price closed Monday at $10.94. Its shares are valued at a price-to-earnings (P/E) ratio of 34x on FY25 earnings estimates using S&P Capital IQ.
VEEM Ltd (ASX: VEE)
If there's a leader in PWR Holding for the global cooling systems market, there's also VEEM for the global marine precision parts market. VEEM introduced products that aimed to enhance efficiency and safety within its industry.
Founded in 1968, VEEM makes advanced marine technology and engineering parts, servicing both the defence and commercial marine sectors. Over the years, VEEM has established a strong reputation for innovation and quality, positioning itself as a key player in the global marine technology market.
This expertise and market leadership led to two exciting opportunities for VEEM. Several years ago, VEEM launched VEEM gyrostabilisers, an innovative product that replaces traditional propeller-based stabilisation. While the product's revenue was just $5 million in 1H FY24, it brings a big market potential. Management estimates its total addressable market would be US$1.1 billion for new builds.
The other exciting venture is VEEM's partnership with Sharrow Engineering. Last year, the two companies announced an exclusive agreement to adapt Sharrow's design to a wider range of vessels. While it's still early days, VEEM saw a positive outcome from initial testing and plans to launch this product line throughout FY25.
VEEM is tightly held by insiders, with Managing Director David Miocevich owning over 50% of the company.
The VEEM share price closed Monday at $1.72. According to S&P Capital IQ, its shares are valued at an FY25 P/E ratio of 30x.
Smart Parking Ltd (ASX: SPZ)
Smart Parking is the smallest company of the three, with a market capitalisation of $173 million, which puts it at the border between small-caps and micro-caps.
The company is growing fast by scaling up its operations. This company has presence in Australia, New Zealand, the UK, Germany, and Denmark.
As the name suggests, Smart Parking specialises in smart parking technology, which helps drivers find available parking spaces more easily and efficiently. Its systems include real-time parking information, automated payment options, and advanced monitoring tools. Smart Parking aims to make parking simpler and more convenient for both drivers and parking operators.
The number of parking sites managed by Smart Parking has grown from 250 in June 2017 to 1,219 in December 2023. During this period, revenue rose from $24.8 million in FY17 to 45.2 million in the last 12 months. As it built scale and operational efficiency, EBITDA margins improved from just 4% in FY17 to over 20% in the last 12 months to December 2023.
In terms of total addressable markets, management estimates there are approximately 45,000 sites in the UK, 90,000 sites in Germany, and 10,000 sites in Denmark. That's a total of 145,000 parking sites, giving a long runway for growth.
The Smart Parking stock closed at $0.48 on Monday, implying a FY25 P/E ratio of 19x, according to S&P Capital IQ.
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Motley Fool contributor Kate Lee has positions in Veem. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended PWR Holdings and Veem. The Motley Fool Australia has positions in and has recommended PWR Holdings. The Motley Fool Australia has recommended Veem. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.