Analyst lowers target price as Serko lines up $50-$75m acquisition

Serko CEO Darrin Grafton at his company's Auckland office. Photo / Dean Purcell

Serko has "substantial opportunity" in the long-term according to a team of Jarden analysts. But its first-half result delivered yesterday was not enough to move the firm from its neutral rating - and, in fact, Jarden cut its 12-month price target from $6.14 to $6.00 (shares closed at $7.85 on Tuesday before a trading halt on Wednesday ahead of a capital raise).

Although revenue recovered sharply, it was still 17 per cent below Jarden's estimate, and the growth of Serko's Booking.com-related business in Europe had slowed, its analysts said.

Jarden said Serko's recovery was "choppy" and that pandemic risks remained. It lowered its full-yar revenue guidance to $22.5m.

Serko saw its revenue continue to recover in its half-year to September 30 as lockdowns eased, but also saw its net loss widen by 50 per cent to $15.2 million.

The ASX/NZX-listed maker of booking and expense management systems for business travellers also launched an $85m capital raise, with a possible acquisition on the agenda.

Serko noted that negotiations are underway for the acquisition of a global travel tech company valued at $50-75m, which would be primarily scrip funded, but with a possible cash component of up to $21m.

The raise consists of a placement, fully underwritten by Craigs Investment Partners and Ord Minnett, that will raise $75m at a floor price of $7.05 per share (a 10.1 per cent discount to the last closing price), plus a $10m retail offer that allows non-institutional investors parcels of up to $50,000 worth of shares.

For the first half, revenue increased 81 per cent versus lockdown-hit first half of 2020 to $9.2m.

Serko forecast full-year revenue of between $21m and $25m, and re-affirmed its "mid-term" goal to hit $100m in annual revenue. No profit/loss guidance was given.

Chief executive Darrin Grafton told the Herald the $85m raise was not because of any cash-burn concerns as the pandemic lingered. He pitched the $85m as a war chest to take advantage of opportunities while rivals were lying low.

Grafton said that approach was also behind the widened net loss as Serko increased R&D to get new products online and seize market share.

"Cash burn has been maintained at below the midpoint and we still have a sizeable cash balance which was $62m at the end of September."

Cash burn, forecast between $2m and $4m per month, came in at $2.9m for the period.

"The raise is about now scaling to dominate and making sure we have the size of balance sheet that enables us to both execute our organic growth objectives but now also execute potential acquisition and scale to really globalise now we've crossed such a huge milestone of 180 countries."

He added: "We need our balance sheet to represent the strength of our intention to drive to take as much of that pie early while balancing the uncertain revenue profile of Covid.

"We are basically saying we've built the foundations and we're here, we've been here through Covid and built the tech. We're growing while others aren't and we are going to back ourselves to scale to dominate what we believe will be an outsized opportunity for a few players."

Zoom vs human nature

Grafton acknowledged the rise of Zoom and growing environmental concerns around travel but said his company was also seeing a resurgence in demand for face-to-face meetings.

He also pitched Serko's platform as more necessary at a time when regulations around Covid are dramatically complicating the nature of business travel (overall, Serko's average revenue per booking actually fell from the prior period's $8.76 to $7.38. But revenue from its new Booking.com for Business platform - a partnership with US cornerstone investor Booking.com, was just under $20).

"We know connecting face-to-face is key and the demand that has been vocal around the MIQ situation for business is a reflection of the demand to connect and win," Grafton said.

"You only have to take comments from Ian Taylor on losing massive deals because he couldn't be there face-to-face to realise how important business travel is to how we grow and win."

He noted his Australian team had recently flown to a trade event in the US, where some 3000 in the travel business were meeting face-to-face.

Grafton said Serko's NZ revenue was up 160 per cent over the first half of 2020, when international travel slowed to a trickle, and domestic travel was tightly restricted for most of the period.

Elsewhere, things were also picking up.

"Even with the fourth wave hitting Europe, we have seen steady transactions on our newly released platform for booking for business and the early signs are extremely encouraging within only six weeks of the migration and under still a very active Covid situation," Grafton said.

"And since the border restrictions eased in Australia we have seen a steady increase in transactions back."

Serko shares closed at $7.85 yesterday for an $843m market cap.

The stock, which is up 40.4 per cent for the year, is now above its pre-Covid valuation.

A trading halt was in place as the NZX opened this morning, due to the $85m placement.