Why You Should Add These 3 ASX Small Caps To Your Watchlist

If you’re looking for ASX small cap shares you’ve come to the right place. Here’s why I think it’s worth looking at shares of Xref Ltd (ASX: XF1), Frontier Digital Ventures Ltd (ASX: FDV) and RPMGlobal Holdings Ltd (ASX: RUL).

What Are Small-Cap Shares?

Small-cap shares come with a higher risk of failure than their larger ‘blue chip’ counterparts simply because they’re earlier stage businesses with sometimes unproven business models.

The following Rask Finance video explains the differences between blue chip stocks and small caps in more detail:

Without further ado, here are three ASX small caps I think are worth considering.

Xref (ASX: XF1)

Xref is a Sydey-based human resources software company that sells “xref credits” to large corporate customers. These credits are used on Xref’s platform to reduce time and effort in hiring new employees across the world. Xref has integrated its platform with leading recruitment organisations and HR software, and most recently announced a strategic partnership with talent management platform PageUp last Wednesday.

The company is quickly attracting new clients and has a number of blue chip companies using its service, including Qantas Airways Ltd (ASX: QAN) and Westpac Banking Corp (ASX: WBC). If Xref can continue to scale up efficiently, it has the potential to reach profitability within 12-24 months. High gross margins means profits could escalate quickly from there, which could make the company worth many multiples of its current market valuation.

The execution risk remains high with Xref but so too is the potential return for those brave enough to take the plunge right now. Personally, I won’t be buying yet but it’s certainly one I’m watching closely.

Frontier Digital (ASX: FDV)

Frontier Digital owns a stake in 14 online classified businesses in a range of emerging markets. The company was founded in May 2014 and is headquartered in Kuala Lumpur, with the aim of becoming the world leader in online marketplace businesses in emerging markets. Frontier Digital has a particular focus on property and automotive verticals and general classifieds/marketplace websites. Currently, it owns leading marketplaces in Pakistan, Central America, Vietnam, Uruguay, Paraguay and more.

Frontier Digital has gone under the radar of most analysts as it is too small for most to consider. However, the company will start to gain increasing amounts of attention as more of its investments cross the line of profitability.

The potential is large with Frontier and significant headway has been made over the past 12 months. I think the current share price undervalues the true value of the company’s investments, which is something that may change as investors become more aware of the potentially huge growth opportunity available.

RPMGlobal (ASX: RUL)

RPMGlobal is a technology company within the mining industry that has traditionally provided advisory services and technical support in relation to mine preparation and planning. Questions of where, when and how to dig are the types of questions RPM’s technical consultants and suite of mining software addresses when dealing with miners looking to extract their commodity in the most efficient way possible.

The company is currently transitioning from a perpetual license revenue model to a subscription-based revenue model. In the short-term, this means that RPM must get across the dreaded SaaS revenue cliff. In other words, revenue initially drops off drastically as large but one-off perpetual license payments are replaced by much smaller but recurring monthly payments.

RPM looks to be making good progress and investors certainly agreed, with the release of the company’s FY19 results leading to a 25% increase in the share price. Like Xref, there is still plenty of execution risk but I think the current share price more than compensates investors for bearing this risk and it is a stock I continue to own in my portfolio.

If investing in small caps isn’t for you but you’re still looking for growth, check out these high-quality ASX growth shares to consider right now.

Disclosure: The author of this article owns shares in RPMGlobal and Frontier Digital. The author has no financial interest in any of the other companies mentioned.

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