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#ASX Announcements
stale
Added 2 years ago

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!

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#Bear Case
stale
Added 2 years ago

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.

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Valuation of $4.76
stale
Added 2 years ago

6/2/2022: Serko has an oft stated mid-term target of NZ$100M revenue, this would require 4x growth from pre-covid levels (FY20 - ends March 2020) and rely primarily on massive growth in the North American market, as current primary markets of AU and NZ are too small and highly penetrated to achieve this.

I believe that AU + NZ revenue will max out at ~NZ$25M, so in reality, NZ$75M will be required from North America to achieve this, which represents growth of 15x from pre-covid revenue of NZ$4.8 (FY20).

Given the size of the North American market I believe this is achievable so the question becomes, how long will this take?

FY21 and FY22 revenues are both heavily COVID impacted and FY23 will be as well to some extent, which continues to delay a return to the pre-COVID level of business travel, although I’m hopeful FY23 will still see Serko achieve revenue growth on pre-COVID levels.

The business has been investing heavily into the North American market despite COVID (hence the increasing Opex) and currently has 10 TMCs and is in discussions with several large US corporates so I expect revenue to jump out of the gates as business travel recovers.

So with hopefully (COVID depending) some growth in FY23 I am assuming they can reach their NZ$100M revenue target in FY26. This still requires extremely high levels of growth so needs to be watched closely.

Serko currently trades on a 27 - 30 x guided FY22 multiple and was as high as 40!

However, that's too rich for my blood and so at $100M revenue I’ll use a more reasonable 10x multiple (like @Melo’s valuation) to give a market cap of $1 billion. At the current share count (120 million) that works out to a FY26 target of $8.33 per share.

Discounting that back by 15% per year to account for the higher risk level, gives a present value of $4.76 per share.

I hold a small position in RL and think the business has great potential so if it drops to below my idea of fair value I’ll be looking to top up.

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Valuation of $8.50
stale
Added 3 years ago
April 2019: $3.77, is my 2 year PT, based on potential, growth, management. Damn - that was quick! From $3.05 to $3.84 (on 7th June) in about 7 weeks! 14-Dec-2019: OK, time for an update..., let's say $4.77. GO, you good thing! 26-Sep-2020: Valuation was marked as stale. Probably is. Raising to $5.27. They should hit that within 12 months and go over $6 within 3 years unless they stuff things up in a big way. I don't currently hold shares in SKO, but I would if I had more cash to invest. I like Melo's investment thesis and commentary on SKO, and suggest people read those straws. 29-Mar-2021: Serko is on the move again. New PT (price target) = $7.77. They've hit all of my other price targets, and I reckon they'll hit this one too within 12 to 18 months, so by September 2022. I am not currently invested in this one. 27 Sep-2021: UPDATE: OK, that $7.77 price target was pretty damn close to the level they've been tagging for the past 4 to 5 weeks. Tempted to leave it there, because they do look fully valued, however I haven't looked at Serko too closely lately, so they are probably worth more than they were the last time I looked at them closely... So all that is to say that I'm raising my PT to $8.50 now. And that's a 12 month PT, so by September 2022. I'm not holding this one at the moment. Not enough upside for my money. There's probably upside, just not enough of it. I see better value elsewhere, like in beaten up gold miners.
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#Company Update 22/3/21
stale
Added 3 years ago

Transaction volumes showing positive uplift

Serko Limited (NZX/ASX:SKO), a leader in online travel booking and expense management for business, today provided a trading update, noting that transaction volumes are showing a positive uplift.

Mr Grafton, Serko’s CEO, said: “During March we have seen transaction volumes increase, with transactions month-to-date averaging 68% of the transaction volumes recorded for the same period in March 2019, which were unaffected by Covid-191 . As previously announced, Serko has assumed in its forecasts that travel volumes will be transacting in the range of 40-70% of pre-Covid levels by March 2021, so we are pleased to see transactions currently tracking to the higher end of this range.

“We are also seeing daily transaction volumes reaching their highest rate since Covid started materially impacting Serko’s travel volumes in mid-March 2020, and are pleased to note that some of this uplift is reflective of continued onboarding of new customers in Australasia despite the effects of Covid.

“These positive trends follow ongoing volatility over the past few months as a result of further Covid-related travel restrictions, which saw transaction volumes range from 58% of prior year volumes for the month of December 2020, 40% for January 2021 and 51% for February 2021.”

“We continue to closely monitor travel trends and hope to see these positive trends continue with the vaccination programs underway in key markets and travel restrictions progressively lifting.” 

DISC: I Hold

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Valuation of $5.20
stale
Added 4 years ago
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Valuation of $4.40
stale
Added 4 years ago
Serko has established itself as the leading corporate software solution in Aus & NZ, and is now expanding into the US and Europe via some cornerstone customers such as Southwest airlines. ANZ ARR: $26 M million, revenue growing over 20% pa. North America: growing at over 200% off a low base. Zeno transactions grew by 200% yoy, and are now 13% of online bookings. Targeted medium term revenue of $100 Million in medium term (I have assumed 4 years). EBITDA margin of 50% forecast at scale! WOW. Long term, I think Serko can grow to a $300 M- $400 M revenue business I believe it can maintain high growth over an extended period, and justifies a premium.
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