New Zealand Professional Investment Services Firm

Forsyth Barr

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Serko<br>Blue Skies Ahead but Clouds on the Horizon</h2>
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<p><strong>NEUTRAL</strong></p>
<p>We initiate coverage of&nbsp;Serko&nbsp;(SKO) with a NEUTRAL rating. We are attracted to&nbsp;SKO's&nbsp;highly ambitious and credible management team, dominance in Australasia and a highly-rated product but note the competitive market structure in the US, historic difficulty in capturing the SME market in Europe and uncertainty around pricing power in Australasia. This is corroborated by speaking with travel consultants, Travel Management Companies (TMCs), corporate travel bodies and competitors.&nbsp;SKO's&nbsp;ambition is to reach NZ$100m of revenue by FY24 which we expect the company to comfortably achieve. We focus the bulk of this report on the key drivers that will determine&nbsp;SKO's&nbsp;longer term outlook and factors that will likely impact sentiment towards the stock. SKO is currently New&nbsp;Zealand's&nbsp;'In Vogue' technology stock and we expect the share price to be supported in the near term by potential TMC contract wins and progression of the&nbsp;onboarding&nbsp;of Booking.com for Business. However, we believe it is premature to be more excited about&nbsp;SKO's&nbsp;longer term outlook, noting the stock has had an excellent run of late and currently offers limited valuation upside in our view.&nbsp;</p>
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<h3>US market is large but dominated by multi-nationals which serve a highly sticky customer base</h3>
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<p>Although SKO has signed contracts with 11 US&nbsp;TMCs&nbsp;to date&nbsp;we are yet to see this translate into material reported US revenue. We understand competitor Concur locks the majority of US&nbsp;TMCs&nbsp;into exclusivity contracts to provide a proportion of travel content (often for free)&nbsp;after cross-selling a range of critical expense products to its corporate clients, resulting in a reduction in obtainable market share for SKO. We await to see if COVID-19 related disruption has reduced the stickiness of corporate clients towards incumbents. Following global travel restrictions due to COVID-19, CWT (the third largest TMC in the US) is exhibiting severe financial distress with its credit rating downgraded to C (lowest rating), dampening&nbsp;SKO's&nbsp;ambition of providing 10% of its content.&nbsp;</p>
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<h3>Booking.com a golden opportunity?</h3>
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<p>In 2019 SKO signed an agreement with Booking.com (BKNG) to provide the front end of its corporate travel platform Booking.com for Business. This public validation of&nbsp;SKO's&nbsp;proposition was combined with&nbsp;BKNG taking a 4.7% stake in SKO during a capital raise, aimed to accelerate&nbsp;the development of its flagship product, Zeno. While the contract with BKNG does open the door to the European SME market, we note a number of competitors have tried and failed in this space due to the lack of loyalty and preferred suppliers by&nbsp;SMEs. AMEX GBT estimated that only a quarter of European&nbsp;SMEs&nbsp;use a TMC to manage corporate travel.&nbsp;</p>
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<h3>Raising Average Revenue per Booking (ARPB) in Australasia may prove problematic</h3>
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<p>SKO has done an excellent job of capturing the Australasian market, penetrating 98% of TMCs and providing content to 75%–80% of the enterprise customer base. However we do not believe it offers material content differentiation that competitors such as Amadeus Cytric Travel cannot offer. We expect SKO to increase attachment rates over time, but question its ability to raise transaction fees.&nbsp;</p>
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<div><strong>Jamie Foulkes</strong></div>
<div><a href="mailto:jamie.foulkes@forsythbarr.co.nz" target="_blank" rel="noopener">jamie.foulkes@forsythbarr.co.<wbr>nz</a></div>
<div>+64 4 914 2217</div>
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<div><strong>Mark Robertson</strong></div>
<div><a href="mailto:mark.robertson@forsythbarr.co.nz" target="_blank" rel="noopener">mark.robertson@forsythbarr.co.<wbr>nz</a></div>
<div>+64 4 495 5264</div>
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Serko Blue Skies Ahead but Clouds on the Horizon

NEUTRAL
We initiate coverage of&nbsp;Serko&nbsp;(SKO) with a NEUTRAL rating. We are attracted to&nbsp;SKO's&nbsp;highly ambitious and credible management team, dominance in Australasia and a highly-rated product but note the competitive market structure in the US, historic difficulty in capturing the SME market in Europe and uncertainty around pricing power in Australasia. This is corroborated by speaking with travel consultants, Travel Management Companies (TMCs), corporate travel bodies and competitors.&nbsp;SKO's&nbsp;ambition is to reach NZ$100m of revenue by FY24 which we expect the company to comfortably achieve. We focus the bulk of this report on the key drivers that will determine&nbsp;SKO's&nbsp;longer term outlook and factors that will likely impact sentiment towards the stock. SKO is currently New&nbsp;Zealand's&nbsp;'In Vogue' technology stock and we expect the share price to be supported in the near term by potential TMC contract wins and progression of the&nbsp;onboarding&nbsp;of Booking.com for Business. However, we believe it is premature to be more excited about&nbsp;SKO's&nbsp;longer term outlook, noting the stock has had an excellent run of late and currently offers limited valuation upside in our view.&nbsp;


US market is large but dominated by multi-nationals which serve a highly sticky customer base


Although SKO has signed contracts with 11 US&nbsp;TMCs&nbsp;to date&nbsp;we are yet to see this translate into material reported US revenue. We understand competitor Concur locks the majority of US&nbsp;TMCs&nbsp;into exclusivity contracts to provide a proportion of travel content (often for free)&nbsp;after cross-selling a range of critical expense products to its corporate clients, resulting in a reduction in obtainable market share for SKO. We await to see if COVID-19 related disruption has reduced the stickiness of corporate clients towards incumbents. Following global travel restrictions due to COVID-19, CWT (the third largest TMC in the US) is exhibiting severe financial distress with its credit rating downgraded to C (lowest rating), dampening&nbsp;SKO's&nbsp;ambition of providing 10% of its content.&nbsp;


Booking.com a golden opportunity?


In 2019 SKO signed an agreement with Booking.com (BKNG) to provide the front end of its corporate travel platform Booking.com for Business. This public validation of&nbsp;SKO's&nbsp;proposition was combined with&nbsp;BKNG taking a 4.7% stake in SKO during a capital raise, aimed to accelerate&nbsp;the development of its flagship product, Zeno. While the contract with BKNG does open the door to the European SME market, we note a number of competitors have tried and failed in this space due to the lack of loyalty and preferred suppliers by&nbsp;SMEs. AMEX GBT estimated that only a quarter of European&nbsp;SMEs&nbsp;use a TMC to manage corporate travel.&nbsp;


Raising Average Revenue per Booking (ARPB) in Australasia may prove problematic


SKO has done an excellent job of capturing the Australasian market, penetrating 98% of TMCs and providing content to 75%–80% of the enterprise customer base. However we do not believe it offers material content differentiation that competitors such as Amadeus Cytric Travel cannot offer. We expect SKO to increase attachment rates over time, but question its ability to raise transaction fees.&nbsp;



Jamie Foulkes
jamie.foulkes@forsythbarr.co.nz
+64 4 914 2217





Mark Robertson
mark.robertson@forsythbarr.co.nz
+64 4 495 5264



Serko: Blue Skies Ahead but Clouds on the Horizon

Serko Ltd

Serko: Blue Skies Ahead but Clouds on the Horizon