In the ever-shifting mood of the ASX, small cap companies often find themselves at the mercy of market sentiment, which can be as fickle as the winds. One only has to look back at headlines within the past two weeks to see alarmist “bear” calls before the US interest rate hold decision.​

Despite the robust updates and promising futures, some companies are experiencing a downturn in share prices, reminiscent of Benjamin Graham’s personification of the market in his seminal 1949 work, The Intelligent Investor. Graham introduced us to ‘Mr. Market’, a hypothetical investor swayed by the extremes of emotion rather than grounded analysis. This sentiment acts as a pendulum, at times swinging between extremes of optimism and pessimism. Frequently, when Mr Market is most fearful, share prices are dragged into a territory that offers unique opportunities for long-term optimists who understand that, eventually, the pendulum will return the other direction and share prices will rise with it.

In this piece, we delve into three companies that, despite positive updates and strong business prospects, seem to have fallen prey to the whims of ‘Mr. Market’. This phenomenon underscores the broader sentiment headwinds faced by ASX small caps, including reduced liquidity and the allure of perceived safer investments. Nevertheless, it’s crucial to remember that, ultimately, share prices tend to align with the intrinsic value of the underlying business over time.

Close the Loop (ASX: CLG) is a global player in sustainable solutions operating within the circular economy.

The business has kicked off FY24 on a promising note. The installation of the new TonerPlas line in Victoria remains on schedule for completion by year-end, with revenue generation expected to commence in early 2024. Encouraged by strong demand, the company plans to expand similar plants across Australia and into the USA, particularly in California, where solidified toner can be blended and used in the state’s roads.

Close the Loop’s strong relationships with original equipment manufacturers (OEMs) are opening doors to new opportunities in the IT asset disposition (ITAD) sector. Initiatives like hard drive destruction and server dismantling are underway locally, contributing to the company’s growing portfolio of sustainable services.

The Packaging business is thriving, driven by the company’s sustainability-focused offerings.

The company recently confirmed it is confident it will achieve FY24 guidance of $43 million Earnings Before Interest Tax Depreciation and Amortisation (EBITDA). Despite the strong announcement, the share price has seen a 28% drop since announcing its results were released. At the share price of 29 cents the stock is on FY24 PE multiple of less than 7 times.

Helloworld Travel Limited (ASX: HLO) has released a promising trading update for the first quarter of 2024, reaffirming its guidance and demonstrating improving demand. Despite this, the share price has seen its share price decline from a peak of $3.21 at the end of August to a low of $2.20 over the last fortnight.

Underlying EBITDA for the quarter grew to $16.8 million, an increase from $5.5 million in the same period of the previous year (Q1 FY23). The company saw Total Transaction Value (TTV) for the September quarter reached $1.232 billion, an impressive increase of 120% compared to the prior corresponding period. Total revenue for the quarter reached $53.6 million, representing a 67% increase over the previous year.

Revenue margin declined to 31.3% following the integration of the lower margin Express Travel Group (ETG).

What is driving the growth?

Helloworld is experiencing increasing demand for leisure travel in Australia, New Zealand, and Fiji, leading to profitability in all geographical operations during Q1. The company has successfully integrated ETG, with over 2,400 network members across Australia and New Zealand and a growing Helloworld Travel Academy. Increasing demand for international travel as well as the ETG acquisition has proved a catalyst for both Wholesale/Inbound and Retail divisions which have experienced significant growth.

Entertainment Logistix (ELX), Helloworld’s concert, theatre and event logistics and transport business foresees a promising outlook. Due to the strong demand management expect that the ELX FY24 sales will exceed the prior year by 25-30%.

Looking ahead, Helloworld is optimistic about the travel industry’s recovery. International and domestic travel has returned, and the company’s strong cash balance and no external borrowings provide a solid financial foundation. Helloworld reaffirmed its guidance for achieving an underlying EBITDA of $64-$72 million for FY24, which places the stock on an enterprise value to Ebitda multiple of 4.5 times.

SRG Global (ASX: SRG) has flown out of the blocks in FY2024.

SRG Global has already secured contracts valued at approximately $176 million. Among them is a 10-year maintenance contract with Transpower New Zealand Limited, worth roughly NZ$130 million (equivalent to around A$121 million). This contract, set to commence on July 1, 2024, initially spans five years with an option for an additional five-year extension starting from July 1, 2029.

The agreement covers specialised industrial services, including tasks like coating removal, protective coating application, and minor steel replacement.

Not only that, SRG Global reported its full year 2023 results in August showcasing strong revenue growth of 26% to $809 million. Furthermore, the company saw a 42% increase in Net Profit After Tax (NPAT) of $31.8 million. With forecast EBITDA growth of 20% in FY24 and a dividend yield of over 6% at current prices we feel the sell off over the previous months is an overreaction.

The journey of these three ASX small caps—Close the Loop, Helloworld Travel Limited, and SRG Global—echoes the sentiment-driven undulations that Benjamin Graham’s ‘Mr. Market’ encapsulates. Despite facing a downward trend in share prices amidst broader market sentiment headwinds, these companies continue to demonstrate resilience and growth potential. The recent downturn does not reflect the underlying strength and optimistic outlooks presented in their recent updates. As seasoned investors know, such discrepancies between price and value often spell opportunity. At TAMIM, we remain firm in our belief that a company’s share price will eventually reflect its true worth, and we continue to monitor these and other promising small cap companies for the long-term potential they hold. In the words of Graham,

As such, for those willing to look beyond the present sentiment and focus on fundamental strengths, these companies may present compelling opportunities for the patient investor.

Disclaimer: Close the Loop (ASX: CLG), Helloworld Travel Limited (ASX: HLO) and SRG Global (ASX: SRG) are currently held in TAMIM Portfolios.