UBS analysts have put a Buy recommendation on 10 ASX small caps heading into February reporting season.

With December 31 in the books, investors will be gearing up for a string of results over the next few weeks.

UBS said the market will head into reporting season on a more cautious note, with 24 ASX stocks in its coverage sphere recording a downward re-rating of their price-to-earnings ratio over the past four months.

Conversely, just four companies posted an upward re-rating.

Since the beginning of November 2021, UBS said concerns around rising interest rates have resulted in “significant valuation headwinds for our Emerging Companies universe”, along with “other impacts including Omicron disruption”.

Nevertheless, the UBS team is bullish on a number of ASX stocks heading into reporting season.

Here are 10 companies with a UBS Buy rating, along with the bank’s price target for each stock:

Code Company Price UBS target % Premium
NTO Nitro Software 1.93 3.80 96.9%
ADH Adairs 3.17 5.70 79.8%
BWX BWX Ltd 3.42 5.50 60.8%
NWH NRW Holdings 1.65 2.40 45.9%
EML EML Payments 3.08 4.40 43.1%
KLS Kelsian Group 7.15 9.80 37.1%
CTD Corporate Travel Mgmt 21.40 27.72 29.5%
SDR SiteMinder 5.91 7.54 27.6%
BRG Breville Group 29.18 35.70 22.3%
GUD GUD Holdings 12.55 13.80 10.0%

Bullish on software

Among its Buy ratings, UBS is the most bullish on Nitro Software (ASX:NTO) — the digital workflow company which specialises in PDF solutions and eSignatures.

Nitro closed yesterday at $1.94 and UBS has a price target of $3.80, a premium of ~95%.

The analysts are backing a turnaround story, after NTO slumped from just under $4 in November amid a broader tech selloff that accelerated into January.

The declines followed a $140m capital raise at $3.43 on November 10, to fund the ~US$80m acquisition of Connective NV, a Belgium-based eSign platform.

Since then, “NTO has lost more than $300m of market cap due to risk around PDF/e-Sign sales slowdowns into 2022 and to a lesser extent the tech selloff”, UBS said.

However, UBS backs the strategic rationale for the purchase, with the view that NTO’s move into enterprise e-Sign software is a “key step in strengthening the moat” around its business model.

“With revenue of US$7m in a ~US$2.5bn industry growing 20-30%, there is a large white space opportunity as Connective expands globally,” UBS said.

While the company’s organic growth is expected to slow slightly, UBS still expects it to post a robust growth figure of 33%.

Other bullish indicators include: expanding staff numbers, pricing growth and up-sell opportunities for Connective, UBS said.

At current prices, Nitro Software is also trading at a comfortable multiple of 4x projected FY22 sales, UBS said.

On that front, UBS expects Nitro to flag updated FY22 sales forecasts at its full-year trading result on February 24.

Bullish on payments

Other notable stock on UBS’ buy list is EML Payments (ASX:EML), which attracted headlines in May last year after the Central Bank of Ireland (CBI) flagged regulatory concerns regarding EML’s subsidiary, PFS Card Services.

After trading above $5 prior to the update, EML shares have struggled for traction in a $3-4 trading range.

In late November, the CBI informed EML the its subsidiary will still be able to sign new customers and launch new programs “whilst staying within the material growth restrictions” prescribed by the bank.

EML shares bounced from around $2.70 to ~$3.50 following that news.

But in UBS’ view, the market still “has not recognised the improved operating environment post the most recent CBI changes, with EML now able to onboard new customers whilst working through the remediation program”.

Those growth restrictions will be removed once the remediation program is completed, UBS said — a scenario it expects to occur in March or April.

“We recognise the market will likely want to see new customers are signing and are able to join the platform before giving full upside for these changes,” UBS said.

However, the analysts reckon EML currently trades at a discount to peers and represents a discount to fair value if the market looks through “short-term regulatory headwinds”.