Corporate Travel Platform And AI Expansion Will Drive Strong Long-Term Earnings Potential

Catalysts

About Serko

Serko provides a scalable, cloud based corporate travel and expense platform, partnering with global leaders to power business travel.

What are the underlying business or industry changes driving this perspective?

• Rapid scaling of Booking.com for Business, supported by strong brand leverage and ongoing product enhancements such as the new checkout experience, should continue to lift completed room nights and drive double digit revenue growth as volumes compound.
• Deepening penetration in North America through the GetThere acquisition, Sabre aligned TMC reseller strategy and direct Fortune 500 relationships positions Serko to capture share as corporate travel budgets normalize, supporting higher long term earnings.
• Early, integrated investment in NDC connections across Sabre and Amadeus and new airline content such as Air Canada and British Airways should increase share of wallet and improve revenue quality, underpinning sustained margin expansion.
• Accelerated AI powered platform transformation, including AI enabled engineering productivity and new data driven customer capabilities, is likely to enhance product differentiation and operating leverage, improving net margins over time.
• Disciplined cost management, FX hedging for euro revenues and the resource reallocation program that targets annualized savings while reinvesting into growth initiatives, should translate strong unit economics into improving EBITDA and a clearer path to profitability.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Serko's revenue will grow by 15.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from -24.4% today to 5.6% in 3 years time.
• Analysts expect earnings to reach NZ$9.3 million (and earnings per share of NZ$0.07) by about December 2028, up from NZ$-26.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting NZ$34.6 million in earnings, and the most bearish expecting NZ$-5.6 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 63.9x on those 2028 earnings, up from -13.2x today. This future PE is greater than the current PE for the NZ Software industry at 26.5x.
• Analysts expect the number of shares outstanding to grow by 0.83% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.49%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent macroeconomic weakness, particularly among small and medium sized businesses in Europe, could keep trip frequency per active customer below prior levels, limiting growth in completed room nights and slowing revenue expansion from Booking.com for Business.
• Serko is materially increasing investment in AI powered platform acceleration and U.S. expansion at a time when net loss after tax is still widening. If these initiatives fail to translate into higher pricing power or volumes, operating leverage may stall and net margins and earnings may remain negative for longer than expected.
• The revised commission tiering with Booking.com and evidence of declining average revenue and commission per completed room night mean that as volumes scale past 4.2 million room nights, unit economics could deteriorate, constraining gross margin percentage and EBITDA growth even if headline revenue continues to rise.
• Execution risk in North America remains elevated, with weaker than targeted U.S. sales, exposure to volatile U.S. government travel volumes and a strategic pivot to travel management company resellers. If large corporates delay adoption of new capabilities, this may suppress long term revenue growth and delay a path to sustainable profitability.
• Serko’s exposure to currency movements, illustrated by large foreign exchange losses and reliance on forward exchange contracts and new hedge accounting, could continue to introduce volatility in reported income. Misjudged hedging positions may erode free cash flow and depress reported earnings in future periods.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of NZ$3.69 for Serko based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NZ$4.55, and the most bearish reporting a price target of just NZ$2.71.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be NZ$164.6 million, earnings will come to NZ$9.3 million, and it would be trading on a PE ratio of 63.9x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of NZ$2.83, the analyst price target of NZ$3.69 is 23.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.