Ord Minnett has initiated coverage of Serko, a New Zealand-based corporate travel and expense technology solution provider with about a 50% market share of bookings conducted via online booking tools in the business and corporate travel expenditure segment in Australia and New Zealand.
The company derives revenue when travel is booked by a corporate customer – usually a travel management company – using one of its products: Zeno, Travel, Expense or Mobile.
Serko currently generates almost all of its bookings from Australia and New Zealand. The company is now entering a period of strong revenue growth, in our view, driven by a range of growth options including expansion in Australian and New Zealand market share, the development of offshore markets – particularly Europe and the US – and an increase in average revenue per booking. This is expected to come from the rollout of its more expensive Zeno product, with increasing attachment rates for add-on solutions and higher supplier commissions.
We expect new distribution capability development to accelerate in the coming years as the airline industry attempts to move to a digital distribution platform. Industry feedback suggests Serko is considered an innovator in this area and so it has the opportunity to benefit from what is potentially the biggest change to occur in the travel agency landscape in the past 50 years.
We have attempted to capture the potential value of large contract wins in the US by attaching a 40% probability weighting to success in this market and adding to our base-case discounted cash flow valuation of $3.00.
Serko has obvious corporate appeal given its growth potential and technology. Despite our positive view, however, at current share price levels we see most of the opportunity available to the company as being already priced in, leading us to initiate coverage with a Hold recommendation and a target price of $3.00, based on our DCF valuation.