Tyro Payments: Distinct Investment Merits Despite Potential Revenue Cyclicality

We cut our fair value estimate on no-moat Tyro TYR 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.

However, our earnings projections are unchanged and Tyro is greatly undervalued. While riskier than its global payments peers, the firm has investment merit. Unlike many small technology firms, Tyro has grown market share while cutting noncore costs and improving profitability. Risks from a cyclical downturn in consumer spending are more than priced in given the large discount to our fair value estimate of nearly 50%. Larger global peers trade at a smaller discount of about 20%.

We forecast net profit after tax growing at a 27% CAGR over five years to fiscal 2028, off a low base in fiscal 2023. Market share gains and operating cost control are expected to drive profits from fiscal 2024 onward. We project revenue growing at an 8% CAGR, while the scaling of fixed costs should help Tyro grow NPAT to AUD 36 million in fiscal 2028, from AUD 11 million in fiscal 2023—its first year being NPAT-profitable.

Market share gains are likely from expanding its merchant categories, rollout, and adoption of new products, and more retail partnerships. We forecast transaction volumes growing 8% per year from fiscal 2023-28, with merchants growing at roughly 6% per year to around 89,800 from the current 68,665.