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Stars Are Aligning For SiteMinder

Small Caps | Aug 02 2023

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Analysts raise target prices for SiteMinder after management brings forward the time frame for being free cash flow positive.

-Buoyant FY23 trading and FY24 outlook for SiteMinder
-Guidance brought forward for positive free cash flow
-Wilsons expects improving customer lifetime value
-Growth fueled by price increases and new products 

By Mark Woodruff

The share price of software-as-a-service company SiteMinder has been on a tear, rising by over 60% from 52-week lows in late-June, helped further along by the company’s FY23 trading and guidance update last Friday.

Ord Minnett expects ongoing outperformance over the next 12-18 months and anticipates the share market will begin to appreciate the size of the opportunity available to the business.

In reaction to the update and FY24 guidance, brokers across the board have raised their respective twelve-month target prices.

SiteMinder operates the world’s leading open hotel commerce platform and offers a full range of products and services to improve the profitability of hotels and accommodation providers.

These solutions include direct and third-party distribution, website design and creation, analytics and market insights, property management and payments.

Management expects FY23 revenue will grow by 31% to $151.4m due to an acceleration in the number of property subscribers in the second half when 2,500 properties were added, bringing the total to 39,100.

Apart from property additions, Wilsons highlights efficiencies from recent digital channel investments and conservative spending by private peers, which should continue to lower customer acquisition costs (CAC) and improve customer Lifetime Value (LTV).

Lifetime Value is the recurring (subscription and transactional) gross margin expected from a property over its lifetime.

Growth in the core subscription product above Jarden’s original forecast is significant as it broadens the long-term growth opportunity, which this broker had previously assumed was relatively mature.

Subscription is a higher gross profit margin product than transaction revenue, which the broker points out bodes well for the margin outlook.

While subscription growth was slightly ahead of Citi’s expectations, the broker’s key highlight of the trading update was the 6% year-on-year increase in subscription average revenue per user (ARPU) to $248.

Product mix and currency are headwinds, suggests Citi, though there is upside risk to ARPU forecasts from price increases put-through for new customers from 1st July, as well as those set to roll out to existing customers over the course of FY24.

Annual recurring revenue (ARR) of $173.1m was an increase of 33% on the previous corresponding period and the highest annual growth rate since shares listed on the ASX in November 2021.

There was a material improvement in underlying cash flow for the fourth quarter of -$5.3m compared to the first two quarters of FY23, resulting in a total -$34m outflow for FY23.

Consequently, SiteMinder expects to be earnings (EBITDA) positive by the second half of FY24 and has brought forward the time frame for being free cash flow (FCF) positive to the second half of FY24 from the fourth quarter of FY24. 

This acceleration in FCF breakeven surprised Morgan Stanley, which now feels its bear case for the balance sheet has been de-risked.

The analysts compare the post-result share price jump to those for both Xero ((XRO)) and Megaport ((MP1)) after demonstrating a similar accelerated shift to positive free cash flow. 

While Morgan Stanley believes the share price will hang onto recent gains, Wilsons has downgraded its rating to Market Weight from Overweight on valuation and suggests any meaningful retracement in the share price is the time for investors to swoop.

Outlook and growth levers

If Wilsons is correct, there are several levers for medium-term growth.

These include price increases, an APAC region travel recovery, along with the Future Intelligence platform and transactional product solutions set for launch in late FY24.

While not including new products in its current forecasts, Jarden agrees with Wilson on potential upside from this source and awaits further product details at the investor day in October.

On evidence of further product expansion, Morgan Stanley would be tempted to upgrade its rating from Equal-weight. 

UBS suggests a return in airline capacity/normalising international airfares should support the ongoing recovery, while Ord Minnett believes the market has overlooked the fact SiteMinder is exposed to holiday travel, one of only few non-discretionary expenditure segments.

The outlook for SiteMinder remains positive, according to Jarden, and the company remains a key pick in this broker’s research coverage in the technology space.

FNArena’s daily monitoring consists of five brokers with three Buy (or equivalent) ratings and two Hold recommendations. The average target price increased to $5.16 from $4.68, which suggest around 22% upside to the latest share price.

Jarden (Buy) and Neutral-rated Wilsons and Goldman Sachs are not monitored daily. These brokers have an average target of $4.54.

Goldmans Sachs and Morgans are yet to update research for June quarter results.

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