Serko released a Trading Conditions update to the market on the 3rd February 2022.

In the update it advised that:

• The rise of the Omicron variant had adversely effected business travel in it's key markets since it last issued guidance with the release of its 1HFY22 results in November 2021.
• Lowered FY22 guidance due to Omicron impacts on travel to NZ$18M - $20.5M from NZ$21M - $25M
• Cash burn averaging NZ$4M per month in 2HFY22.

My thoughts:

Such an update wasn't unexpected given the impact of Omicron so no real surprises. However it does confirm delay on return to revenue growth on pre-COVID levels and continued deep losses and burning through cash. I don't think it really impacts the thesis though and I'd already considered this update in my recent valuation straw.

After the most recent cap raise of NZ$85M and the NZ$52M cash they had at the end of 1HFY22, minus 4 months cash burn of NZ$16M, they should have NZ$121M left.

If they make NZ$20M in revenue in FY22 and burn NZ$48M, so net cash outflow of NZ$28M for the year, which is slightly better than FY21, it means they have 4 years of cash left, if losses don’t widen further. Hopefully they can get to breakeven by that point so they don’t have to raise again although I think that’s most likely a forlorn hope!

The obvious one is COVID. It has had a massive impact on the travel sector, including business travel, with border closures, lockdowns and travel restrictions from both government and private organisations causing business travel to virtually evaporate.

Speaking from personal experience as someone who usually travels a lot for business, I averaged over 50 flights a year pre-COVID but have been reduced to less than 10 per year the past 2 years.

The longer the pandemic goes on the longer Serko’s revenues are suppressed and, as a loss making business, the more cash it burns through. This has already lead to several capital raises and the share count increasing by 30% since the start of the pandemic as Serko raised capital to fund itself. If it goes on for too long Serko may eventually find no one wants to give it any more money. Even if that does not happen, the dilution risk to shareholders is real.

More structurally, the risk is that the North American expansion does not take off. Given the Bull case is based almost entirely on overseas expansion (particularly North America) and it trades on extremely high revenue multiplies with massive growth expectations baked in, if that happens Serko will suffer a brutal re-rate as the market adjusts expectations.

To my mind this is the greater risk than COVID.