Company Reports

Tyro Payments provides merchants with the required infrastructure to accept electronic payments, as well as business banking products. It is the fifth-largest merchant acquirer in Australia by terminals, behind the major four banks. The firm mainly caters to small to medium-size enterprises in the hospitality, retail and health sectors. It is also expanding into adjacent verticals like trade, accommodation and services.

No-moat Tyro’s fiscal 2024 results slightly exceeded expectations, with underlying EBITDA—its preferred profitability measure—growing by 32% from the prior year, beating our forecast by 4%. But the beat was lower-quality, driven primarily by higher-than-expected merchant fees, interest income, and corporate segment income. Transaction volume growth, both overall and on a per-merchant basis, as well as loan originations, fell below expectations, indicating that revenue-maximizing measures dampened volumes. Consequently, we lower our fair value estimate to AUD 1.60 per share from AUD 1.70. While we raise our revenue margin assumptions (merchant fees and interest), this is offset by our expectations for low-single-digit volume growth, indicating market share losses, contrasting with our prior expectation of high-single-digit growth.

No-moat Tyro remains materially undervalued at current prices. Among various risks, investors may be concerned about potential merchant defections after Kounta—a point of sale partner of Tyro and a subsidiary of Tyro’s Canadian-based competitor Lightspeed—was found marketing Lightspeed’s payment terminals directly to Tyro’s merchants in September 2023. Additionally, transaction volumes may decline due to higher interest rates and inflationary pressures constraining consumer spending. However, we think concerns are overblown and still see value in Tyro, given its superior utility to merchants, which should counter risks.

Tyro Payments provides merchants with the required infrastructure to accept electronic payments, as well as business banking products. It is the fifth-largest merchant acquirer in Australia by terminals, behind the major four banks. The firm mainly caters to small to medium-size enterprises in the hospitality, retail and health sectors. It is also expanding into adjacent verticals like trade, accommodation and services.

The 41% increase in no-moat Tyro’s first-half fiscal 2024 EBITDA to AUD 27 million slightly exceeded our forecast. Its increased EBITDA margin of 26%, above 20% in the previous corresponding period, demonstrates strong operating leverage, driven by both volume growth and effective cost management—namely cost reductions and process automation. This suggests Tyro is on track toward maintainable profitability from previously incurring losses, with fiscal 2024 guidance indicating continued growth in volumes and earnings compared with fiscal 2023. Although guided volume growth was slightly below what management had expected, the increased earnings guidance suggests the potential for further monetization of products and reduction of noncore costs to compensate for softer volume growth.

Tyro Payments provides merchants with the required infrastructure to accept electronic payments, as well as business banking products. It is the fifth-largest merchant acquirer in Australia by terminals, behind the major four banks. The firm mainly caters to small to medium-size enterprises in the hospitality, retail and health sectors. It is also expanding into adjacent verticals like trade, accommodation and services.

We cut our fair value estimate on no-moat Tyro to AUD 2.00 per share from AUD 2.60. We raise our cost of equity assumption to 9.0%, up from the previous 7.5%. This brings our assumption above Tyro's larger global peers such as Worldline, FIS, and Fiserv. We expect Tyro’s revenue to be more cyclical than global counterparts given greater exposure to small-to-medium enterprises, notably retail and hospitality merchants, which are more discretionary. Its proportion of fixed costs is also higher than peers, which may adversely affect earnings if revenue declines. Operating margins are expected to average 6% over the next five years, below an average of 24% for its larger peers. Given these attributes, we can no longer support our prior assumption of a lower discount rate for Tyro.

Tyro Payments provides merchants with the required infrastructure to accept electronic payments, as well as business banking products. It is the fifth-largest merchant acquirer in Australia by terminals, behind the major four banks. The firm mainly caters to small to medium-size enterprises in the hospitality, retail and health sectors. It is also expanding into adjacent verticals like trade, accommodation and services.

We maintain our AUD 2.60 per share fair value estimate for no-moat Tyro. Adjusted EBITDA, Tyro’s preferred profitability metric, of AUD 42 million for fiscal 2023 was broadly as expected. The lower-than-expected payments gross profit margin, given higher processing costs, is slightly disappointing, but resilient Tyro bank margins offset this downside. Strong volume growth and effective cost control helped Tyro realize its first full-year net profit after tax of AUD 6 million. The improved operating leverage trend continued into fiscal 2024.

We initiate on Tyro Payments with a fair value estimate of AUD 3.40 per share and no moat rating. The firm has high fair value uncertainty, but displays Exemplary capital allocation and a positive moat trend.

Tyro Payments provides merchants with the required infrastructure to accept electronic payments, as well as business banking products. It is the fifth-largest merchant acquirer in Australia by terminals, behind the major four banks. The firm mainly caters to small to medium-size enterprises in the hospitality, retail and health sectors. It is also expanding into adjacent verticals like trade, accommodation and services.