Citi names its 7 top small caps picks for 2025

The new year has just started, but investors are already facing a wall of worries, from a potential reacceleration in inflation, soaring bond yields, and a pullback in rate cut expectations. Yet, these bearish threats are nothing new to markets. Similar hotter-than-expected inflation data and rising yields last year presented several buying opportunities.

Citi analysts have come forth with some of the top small-cap picks (ex-ASX 100) and as well as one to avoid.

Citi's Top Small Cap Picks

Source: Citi Research January 2025 | % Upside based on Friday, 10 January close

Upside Picks

Siteminder is Citi's top pick in the small-cap tech sector due to its accelerating revenue growth and the successful launch of new products such as Smart Distribution and Dynamic Revenue+. These innovations are expected to drive revenue growth from 19% year-on-year in 1H25 to 29% by 2H25, setting a strong foundation for future expansion.

Despite near-term risks to consensus revenue forecasts, the long-term outlook remains positive. Management's efforts to meet FY27 long-term incentive (LTI) targets further bolster confidence in the company's growth trajectory.

Champion Iron’s high-grade iron ore production positions it favourably in the shift toward greener steelmaking. The company’s Bloom Lake Phase II expansion has significantly boosted production, while its diversification strategy aims to reduce reliance on Chinese buyers by expanding into Middle Eastern and European markets.

With increasing demand for higher-grade iron ore, CIA is well-placed to capitalise on the growing adoption of electric arc furnaces. This supports both decarbonisation efforts and the company’s ability to command a premium for its upgraded 69% direct reduction pellet feed (DRPF) product.

Capstone Copper is uniquely positioned to benefit from rising copper prices and expanding production capabilities. Its plan to double production to ~400ktpa highlights its growth potential, with organic opportunities to reduce costs further.

The company’s diversified operations across the Americas, coupled with a robust resource base of 14.3 Mt of copper, provide significant upside. Analysts also view incoming leadership as a potential catalyst for improved guidance and delivery.

Middle of the Pack

Analysts are optimistic about EVT due to a strategic shift in its business focus. The company is prioritising growth in its hotels segment, hinting that its cinema operations could be non-core. This aligns with recent comments from the Chairman, Alan Rydge, at the AGM, emphasing the importance of boosting shareholder returns through a higher share price and dividends. In addition, EVT's property portfolio (valued at $2.3 billion or $11.89 net tangible assets), underpins its valuation.

The resolution of the Hollywood strikes further bolsters its cinema business, with an anticipated surge in blockbuster releases set for CY25. Titles like Avatar: Fire and Ash and Zootopia 2 are expected to drive strong box office performance, adding momentum to its recovery.

After years of disruptions to business travel, Corporate Travel is entering a recovery phase. The company benefits from improving corporate travel trends in the US, the reversal of American Airlines commission cuts, and steady progress in the ANZ market.

Corporate Travel is trading at a price-to-earnings approximately 30% below its 10-year pre-pandemic average due to depressed earnings. This discount, combined with improving earnings visibility, positions CTD as a compelling opportunity in the travel sector.

NRW is well-positioned to capitalise on strong project award momentum across its three operating segments. With a robust order book covering more than two years of forecasted revenue, the company continues to pursue tenders aggressively, demonstrating confidence in its workforce capacity and ability to scale as needed.

NRW’s disciplined approach to tendering ensures a favorable return/risk balance, and the Kalgoorlie Consolidated Gold Mines (KCGM) growth project, valued at $973 million, remains ahead of schedule. This could allow NRW to book higher margins due to its incentivised target cost structure. Despite potential short-term weather-related challenges in Queensland, analysts expect a guidance upgrade during its interim results.

Small Caps to Avoid

Temple & Webster stands out for its strong Black Friday 2024 performance, with double-digit growth in both web traffic and app usage, reflecting its ability to navigate challenging market conditions. However, the analysts believe upside seems limited after the share price rally towards the end of 2024 (up around 30% between mid-Nov and early Jan).

Factors that will continue to support TPW's outperformance and market share gains include:

• Cheapest pricing for homewares on a comparable basis

• Cheapest and fastest delivery among peers

• Focus on establishing awareness of the TPW brand

• Great counter position vs. bricks & mortar competitors

Eagers Automotive faces significant headwinds as the automotive industry struggles with oversupply and weakening retail demand, leading to compressed profit margins. Industry feedback suggests the average profit before tax margin fell to just 1% in 2H24, with further declines likely as consumer demand remains subdued.

"We don’t believe we are at the bottom of the cycle, with industry levels still elevated and consumer demand likely to remain subdued until rate cuts," says Citi.

Although acquisitions may present opportunities for consolidation, analysts caution that these could be margin-dilutive in the short term. APE’s exposure to Toyota also limits its ability to diversify through acquisitions.