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COMMENT:
No-one in their right mind is backing a travel booking software developer smack bang in the middle of the Covid-19 pandemic, right?
Wrong.
Investment house Jarden started research coverage of Serko last week, slapping an "outperform" rating on the firm and putting a target price of $4.45 on thestock, more than twice the $1.95 it was trading at before then.
Admittedly, Serko had been one of the stock exchange's stars in recent years, shooting as high as $5.80 a share in January and seeming like a shoo-in to join the benchmark NZX 50 index.
Quickly after its 2014 IPO, the online travel firm learnt the hard way not to disappoint the market after late product roll-outs saw it downgrade guidance a couple of times.
The firm's management team took it in their stride and adopted a more deliberate approach in telling their story to the investment community to bring them along for the ride.
And local heavyweight fund managers Harbour Asset Management, Milford Asset Management and Fisher Funds Management bought in, collectively owning almost 21 percent of the firm.
At the end of 2019, Serko seemed to have the world at its feet, having turned north to make a real go of the European and American markets, buying US expenses software firm InterplX and sidling up more closely to online booking website giant booking.com.
Then along came the Covid-19 outbreak, which pulled the rug out from underneath Serko's core business of supporting corporate travel. That saw the shares tumble as low as 87 cents in late March, although they were at $2.30 heading into the Easter holiday.
Unsurprisingly, Serko pulled its revenue guidance for the year ended March 31 as restrictions on domestic and international travel started to bite. Since then, it's clamped down on spending to preserve its cash through what it anticipates will be a year of restrictions.
The big thing in its favour is that Serko raised $45 million of capital late last year, and still has $42 million sitting in the bank.
It reckons it can keep its cash burn down to about $2 million a month, meaning it can batten down the hatches of what will be a harsh global recession for more than 18 months.
That's a big tick for Jarden analysts Wassim Kisirwani and Wilson Wong.
While Covid-19 has upended the travel industry, all but wiping out corporate travel for the time being, it will eventually end, and companies that survive and invest will get a jump on their rivals.
"Serko has some advantages in this respect, chief among them being its strong balance sheet," Kisirwani and Wong said in their first report on the company.
"Serko has ample cash reserves to withstand a severe downturn over the next 18 months and can even maintain some level of product development through this period."
The Jarden analysts readily admit they don't have any special insight into how the pandemic will play out, but they do rate Serko's team highly enough to back them as a firm that can accelerate change and take advantage of the massive disruption facing the industry.
The bulk of Serko's business is exposed to transtasman travel. The Jarden analysts estimate that traffic dropped 70 per cent in February and March from a year earlier, and that it will fall even further through the six months ending September 30.
After that, it will be a gradual incline before volumes recover in the March 2023 financial year.
Serko's core product has been well received by travel management companies, and the firm has been pouring money into upgrading clients on to its new product – Zeno – which offers a broader and better user experience. And a bigger slice of the pie for Serko.
Jarden's Kisirwani and Wong see the tie-up with booking.com as "potentially transformational" if it can convert that into success in Europe. Their base case scenario is achieving four million bookings by the March 2024 year, which would generate $78 million of revenue, depending on the exchange rate, for Serko, the lion's share of what's projected to be annual revenue of $130 million. In 2019, Serko generated revenue of $23 million.
Navigating the post-Covid-19 environment while simultaneously upgrading its core product and pursuing growth in both Europe and the US will be no mean feat, and Jarden's analysts note execution will be key.
"Serko's journey over the next two years will be volatile, and forecasting operating and financial metrics accurately will be difficult, although there will be key indicators of progress that will be critical to observe."
Ultimately, the future may be out of Serko's hands. Not only could the pandemic plunge the global economy into such a deep recession as to lead to a protracted decline in corporate bookings, but the rising use of online platforms, such as Zoom, replacing more discretionary travel than anticipated could also spell trouble.
No one ever said chasing a billion-dollar market was easy.
