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Why this high-flying small cap is one to watch in 2020

Cathryn Goh
Online travel booking

If you’re looking to supercharge your portfolio returns, ASX small caps can be a great place to start. However, small-cap shares are undoubtedly risky, so it’s important to focus on the highest quality companies with great products and attractive business fundamentals.

Here’s why I think Serko Ltd (ASX: SKO) fits the bill.

Serko is an Auckland-based online travel and expense management technology provider. The company’s core software, Zeno, addresses 2 main functions: corporate travel and expense management.

Corporate travel

Zeno Travel is an online travel platform that delivers AI-powered end-to-end travel itineraries, cost control and travel policy compliance to corporate customers.

Over time, Zeno learns traveller preferences and recommends customised itineraries, for example, displaying favoured hotel chains first and remembering aircraft seating preferences.

Expense management

Zeno Expense provides finance teams with intelligent technology to automate and streamline the expense administration function, identify out-of-policy expense claims and prevent fraud.

Zeno is integrated with Uber for Business and can ingest or share data with several enterprise resource planning and accounting software providers including Xero Limited (ASX: XRO), SAP, Intuit and MYOB.

Serko’s business model

It’s important to note that Serko doesn’t sell its solutions to corporate customers directly. Instead, Serko goes to travel management companies (TMCs) such as Corporate Travel Management Ltd (ASX: CTD). These TMCs act as reseller partners and provide Serko’s solutions to corporate customers as part of their overall managed travel service.

Serko charges TMCs a fee per booking on its Travel platform, which varies based on volume, while Serko Expense customers pay a fee according to the number of active users each month (i.e. employees).

Serko’s business model is attractive because of its recurring nature and the stickiness of its revenue. Once customers get in the habit of using Zeno to seamlessly book and manage their business trips from door-to-door, and/or adopt the expense platform to record, reconcile and review expense claims, Serko’s software is embedded into customers’ lives. This ultimately leads to revenue that is sticky in nature, as customers may be unwilling to give up the level of automation, convenience and insight that Serko’s solutions provide.

Market opportunity

The managed travel markets in North America and the UK/Europe are estimated to be worth a whopping $338 billion and $330 billion, respectively. While it can often be a dangerous game to rely on generalised total addressable markets, these figures offer investors an insight into just how important this industry is.

Serko primarily operates in Australia and New Zealand, but its sights are firmly set on global expansion. Serko launched in the UK market in FY19 and has signed several TMCs in the US and Canada, which are expected to begin materially contributing revenue as early as this year.

To facilitate and accelerate these global growth initiatives, Serko recently completed a NZ$45 million capital raising, through which travel booking giant was a cornerstone investor.

Foolish takeaway

Serko is an exciting small-cap ASX tech share that has attractive business fundamentals and a lucrative runway for further growth. As demand for its solutions only increases, it’s no wonder the company has experienced enormous share price growth over the last few years.

At current levels, it may be prudent for investors to remain on the sidelines until presented with a more reasonable buying opportunity. However, with the business seemingly going from strength to strength, there’s no telling when that may be.

The post Why this high-flying small cap is one to watch in 2020 appeared first on Motley Fool Australia.

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Cathryn Goh owns shares of Xero. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Serko Ltd. The Motley Fool Australia owns shares of and has recommended Corporate Travel Management Limited. The Motley Fool Australia owns shares of Xero. The Motley Fool Australia has recommended Serko Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2020