Why Qualitas (ASX:QAL) could enter the ASX 300 this September

For ASX-listed companies, joining an index (such as the ASX 300) can be a very prestigious event.

It means you made it, in the sense that you are now one of the larger companies on the exchange.

But it goes further than that.

Entry into an index doesn’t just increase your profile; it means more analysts start following you and dissecting your results. It also opens up a much larger pool of potential investors (large private and institutional funds) by entering their universe of stocks, which their investment mandates restrict them to investing in. It also adds to a company’s credibility.

Another byproduct is that it forces every index fund that tracks that index to buy shares in the newly added company.

As such, it isn’t unusual to see the share prices of companies that have entered an index increase on the announcement of their addition.

A new (property) listing?

ASX alternative investment manager, Qualitas (ASX:QAL), is one such company that could find itself on the precipice of joining one of the ASX’s key indices, the ASX 300.

Qualitas manages a series of investment funds that focus on different niches of the real estate market, from real estate private equity to development financing and real estate private credit. As such, it is one of the few ASX stocks that are exposed to property without technically owning any property directly. This includes, as highlighted by the most-followed Simply Wall St Narrative for Qualitas, that it finances around one in every ten multi-dwelling buildings in Australia.

Given its business model, it is an interesting company for investors looking at adding property exposure, but wanting a company that offers stronger growth and less balance sheet debt than your typical real estate investment trust or even the big four banks.

Over the past five years, Qualitas has grown revenue by approximately 13.6% per year. However, due to its managed fund business model, which exhibits strong operating leverage where revenue increases don’t come with an equivalent increase in costs, it has used that revenue growth to increase earnings by 20.1% per year over that same time frame.

This means the company has shown extremely strong growth over many years, despite the difficult macroeconomic environment it has operated in since listing on the ASX in 2021. Furthermore, as shown above, analysts are expecting the company to continue growing at a strong rate in the future.

Why Qualitas might soon join the ASX 300

A company doesn’t just join an index.

The ASX 300 is only changed (or “rebalanced”) twice a year, in March and in September.

At the time of writing, the smallest member of the ASX 300 is a construction and engineering company, Civmec, with a market capitalisation of just under $905 million. This is already smaller than Qualitas’market cap of around $935 million.

Of course, Standard & Poor's (or S&P), the business responsible for managing the indices, doesn’t solely take market capitalisation into account. It also considers liquidity. However, with millions of dollars of Qualitas stock trading every day and free float (the proportion of a company's shares that are considered available for public trading) usually above 70%, it is feasible that Qualitas also meets this requirement.

Of course, there are other factors than what has been described above before S&P decides to include Qualitas or not.

With the September rebalancing approaching, we’ll soon find out.

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Simply Wall St analyst Andrew Legget and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.