2 small-cap ASX stocks with lots of potential: experts

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Key points

  • ASX small cap stocks can have a lot of growth potential
  • City Chic is a global plus size women’s apparel retailer experiencing strong growth in the United States.
  • Volpara is a Breast Cancer Screening Health Tech Company Growing Subscription Revenue at a Rapid Rate, with Gross Profit Margin

ASX small cap stocks may be able to provide attractive capital growth as they start from a relatively small base compared to the current size of ASX blue chips.

Not all small businesses are destined to carry on and earn strong returns.

However, expert analysts have concluded that both of these options seem very compelling:

City Chic Collective Ltd (ASX: CCX)

City Chic is one of the world’s leading specialty retailers selling plus size women’s clothing, shoes and accessories. It sells through a number of brands and websites, including City Chic, Evans, and Avenue.

Over the past few weeks, City Chic’s stock price has fallen, providing more value for potential investors. Since November 22, 2021, City Chic stock has fallen 23%.

Broker Macquarie is currently pricing this ASX small cap stock as a buy with a price target of $7.10. This suggests a potential rise in City Chic’s share price of more than 40% over the next year.

City Chic recently provided a business update for the 26 weeks through December 26, 2021. It included revenue growth of 49.8% to $178.3 million, driven notably by growth of 62 % in the Americas at $77.2 million. The City Chic USA and Avenue websites are performing well.

However, underlying earnings before interest, taxes, depreciation and amortization (EBITDA) are expected to be roughly flat and in the range of $22.5m to $23.5m for 1H22. Management said this was satisfactory due to a $4 million decline in EBITDA due to store closures, the impact of acquisitions and the market related to COVID-19 and cost reduction measures taken during the previous corresponding period.

Macquarie puts City Chic share price at 26x estimated FY23 earnings.

Volpara Health Technologies Ltd (ASX: VHT)

Volpara’s mission is to save families from cancer. He is well advanced with his breast cancer screening services and he is also working on a lung cancer offering.

More than 13.4 million American women now use at least one Volpara product, as well as many women in Australia and New Zealand. In America, the small cap ASX has a market share of around one-third.

The health-tech company says its strategic business partnerships have paved the way not only for genetic testing for breast cancer (which helps reduce patient risk), but also for expansion into the U.S. market lung cancer where AI and software offer the prospect of saving many lives.

Volpara continues to post a very high gross profit margin, it was over 91% in the first half of FY22. It also saw its subscription revenue jump 35% to NZ$11.8 million , an increase of 42% in constant currencies. Annual recurring revenue (ARR) reached NZ$29 million at the end of the period.

The ASX small-cap stock is working on several ways to increase its average revenue per user (ARPU), which includes upselling more of its platform to the same customers so they can provide a better service to customers and operate more efficiently.

Over the past three months, Volpara’s share price has fallen by around 30%.

Morgans is currently pricing the company as a buy with a price target of $1.94. This implies an upside potential over the next 12 months of nearly 120%. In a recent newsletter, the company said its FY22 third quarter (through December 2021) had already beaten its previous best third quarter in terms of net new ARR added.

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