Where to Find Undervalued Opportunities in Australian Small Companies

Australia’s small cap segment is entering a new phase. After several years of underperformance, valuations across the S&P ASX Small Ordinaries Index remain compressed compared with larger companies. This provides a favourable backdrop for investors looking for undervalued opportunities supported by improving fundamentals.

Recent market movements show early signs of a structural shift. Selective companies with disciplined balance sheets, strong earnings visibility and clear catalysts are starting to re-rate. For patient investors, this environment provides one of the most attractive entry points in the small company universe in years.

The Case for Re-Evaluating ASX Small Caps

Institutional capital is beginning to rotate back into Australian small companies. BlackRock, among other global managers, has recently increased exposure to the Small Ordinaries while trimming large cap positions. This shift is driven by several forces.

Valuation Support

Small caps continue to trade at a notable discount. Price to earnings ratios near 11 compare with materially higher multiples in the ASX 100.

“Small cap earnings multiples remain at a material discount to large caps, something highly unusual historically,” Emanuel explained.

Earnings Stabilisation

Margins are improving across a growing cohort of smaller companies. Cost discipline and operational improvements have supported more predictable earnings guidance. Independent research from Morningstar shows that Australian small caps have steadily closed the performance gap with large caps since mid 2022. This shift reflects improving earnings resilience and renewed investor appetite for the segment.

Improved Liquidity

Liquidity conditions across the small cap segment have improved through recent quarters. Trading activity has increased across a broader range of companies, supported by more stable market conditions and stronger institutional engagement. This has resulted in deeper order books, smoother execution and improved capital flows into higher quality businesses.

Relative Outperformance

The Small Ordinaries Index has outperformed the broader market this year. This reflects changes in pricing dynamics, earnings sentiment and capital allocation trends.

These factors set the stage for selective opportunities that are undervalued relative to fundamentals.

How Valuations Compare Across the Australian Market

The valuation gap between large and small companies remains unusually wide. This reflects multi year underperformance in the small cap universe and delayed recognition of earnings improvement.

Emanuel Datt notes that this persistent gap creates an opportunity for investors who apply independent analysis rather than relying on index movements.

This gap is beginning to narrow as macro conditions stabilise. Investors are allocating capital towards companies with sound unit economics and improving earnings visibility. The dispersion in fundamentals remains significant, providing a favourable environment for research led stock selection.

Inside the Datt Small Companies Fund

The Datt Small Companies Fund is designed to take advantage of mispriced opportunities outside the ASX 100. The strategy focuses on high quality Australian small companies with clear operating leverage, disciplined capital management and the capacity to compound value through a full market cycle.

The fund typically holds 15 to 25 positions. This creates a concentrated but risk aware structure that focuses on conviction rather than broad diversification. The approach remains sector agnostic, with recent contributors coming from both resources and technology.

Emanuel emphasises the importance of independent primary research. The team builds conviction before the market recognises value, supported by a research framework that avoids external consensus.

“We do all our own primary research, building independent conviction before the market does,” Emanuel says. “Our alignment with investors ensures we share the same outcomes.”

Where Undervalued Opportunities Are Emerging

1. Gold and Precious Metals

Gold producers have benefited from strong pricing and investor demand for defensive assets. Within this theme, positions such as Meeka Metals, Genesis Minerals and and General Minerals have been supported by improving production profiles and stronger balance sheet visibility.

“The company (Meeka Metals) re in a pretty unique situation for a small gold producer in the sense that in the sense that they are quite long ore.

“They’ve got a good asset, they’ve got a very competent and well aligned team to run it, and they’re economically robust in the sense that they haven’t taken up debt or been too aggressive in their financing.”

2. Domestic Resource Security

Companies tied to domestic resource development are finding renewed support as Australia focuses on supply resilience and processing capability.

3. Technology and Automation

The key question in Australian technology is who captures the productivity upside from enterprise automation and AI adoption. Select firms with repeatable revenue, disciplined cost structures and scalable platforms are positioned to benefit.

These areas share a common feature. Their fundamentals have improved faster than their share prices.

The Structural Drivers Supporting Re-Rating Potential

Several market forces support the re-emergence of undervalued opportunities across Australian small companies.

• Earnings quality is improving: Margins are stabilising and operating leverage is becoming clearer across a wider group of companies.
• Entry points remain attractive: Valuations provide a margin of safety that is not present in many large cap names.
• Institutional signalling is shifting: Large managers increasing exposure indicates confidence in the segment’s risk adjusted outlook.
• Market structure is changing: Capital is beginning to favour companies with strong balance sheets and durable earnings rather than simply size and index weight.

Why This Matters for Investors

Small companies often lead early in market recoveries. They benefit from operating leverage, M&A activity and capital flows. Yet they remain under owned after years of relative weakness. The current environment presents a rare window for investors who apply disciplined research and maintain a long term mindset.

At Datt Capital, independent research and alignment with investors are central to this process. We continue to focus on high quality businesses positioned to benefit from Australia’s next growth cycle while maintaining a focus on capital preservation.

To explore how the Datt Small Companies Fund targets undervalued opportunities in the Australian market, visit our Small Companies Fund page or contact Daniel Liptak, Head of Distribution, at daniel@datt.com.au.

FAQs: Australian Small Cap Investing

What defines an Australian small company?

Typically companies outside the ASX 100 with smaller market capitalisation and higher growth potential.

Why are small cap valuations attractive today?

They have underperformed for several years and now trade at discounts to large cap peers despite improving fundamentals.

Is the Datt Small Companies Fund a high risk investment?

Small caps can experience volatility, but the fund applies strict due diligence and risk controls to preserve capital.

How is this fund different from other fund managers in Australia?

Datt Capital applies a fully independent, research led approach with principals investing alongside clients.

Can the Small Companies Fund be used alongside an absolute return strategy?

Yes. Many investors combine both to balance growth potential and capital stability.