Technology

Tyro Payments offers attractive entry point: UBS

Wed 16 Mar 22, 4:00pm (AEST)
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Key Points

  • UBS flags an attractive entry point
  • Half-year transaction value was up 30.6% to a record $15.8bn
  • Ord Minnett expects transaction volumes to continue rising and cites improving retail & hospitality tailwinds

After experiencing a rollercoaster of a start to 2022 – which has seen the share price freefall by over half [since early-November], Tyro Payments (ASX: TYR) received welcomed good news with UBS initiating coverage on Australia's fifth largest payments terminal provider with a Buy.

The broker’s target price of $2.30 offers 36.2% upside to the current price.

With the de-rating having seen the valuation reduce to a 4x premium, from a peak 12x premium, UBS flags what appears to the broker to be an attractive entry point.

To the uninitiated, the mid-cap tech stock provides payment terminals for thousands of small businesses, including cafes and retailers, Australia-wide.

Growth upside

While UBS forecasts a group transaction value compound annual growth rate (CAGR) of 15% over the next five years, the broker reminds investors that a key to achieving this growth target will be larger and enterprise merchants.

Relative to the company’s peers, the broker is attracted to Tyro’s broader payments ecosystem. Based on the UBS’ numbers, the company has 16% market share in its key verticals of retail, hospitality and health.

Performance

Some of the recent share price deterioration can be attributed to a broader tech selloff in the US that ricocheted onto the local tech sector. Adding to market jitters over the sector at large was a first half result full of brick bats and bouquets.

First the good news: Half-year transaction value was up 30.6% to a record $15.8bn, due in part to an alliance with Bendigo Bank (ASX: BEN) which novated more than 18,000 new merchants across to Tyro.

Revenue also jumped 29.9% to $149.2m and payments gross profit (before the Bendigo profit share) grew 25.4% to $68.1m.

However, earnings (EBITDA) for the half year were down by two-thirds at $2.8m due in part to the cost of assisting merchants through lockdowns, including terminal rent relief to its covid-impacted customers and deferring pricing adjustments that are usually made annually to offset fee changes.

Following the first half result, Tyro CEO Robbie noted:

“While lower than first half last year, our positive EBITDA result [of $2.8m] reflected our continuing investment in growth initiatives, the absence of any JobKeeper benefits, wage inflation and first-time costs associated with our newly acquired Medipass operation.”

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Tyro Payments has significantly underperformed the All Technology Index over the last six months.

What other brokers think

Based on the five brokers that cover Tyro (as reported on by FN Arena), the stock is currently trading with 75.5% upside to the current price.

Ord Minnett expects transaction volumes to continue their uptrend due to improving retail and hospitality tailwinds. Following a seasonally weak January, the broker is encouraged by the 43% uptick in transaction volume for the company in February, and retains a Buy rating and $3 target price.

Morgan Stanley expects the earnings miss, courtesy of higher costs and the Medipass acquisition, to result in a consensus FY22 earnings forecast downgrade. The broker retains an Overweight rating and $4.70 target, which represents 178% to the current price (22/02/22).

Despite the first half results miss due to higher costs, Macquarie highlights the company’s healthy balance sheet, and ability to generate operating leverage within the competitive payments industry.

In light of the market’s overreaction, the broker upgrades to Outperform from Neutral, with the target reducing to $2.15 from $3.50.

Consensus on Tyro is Strong Buy.

Based on Morningstar’s fair value of $3.22, the stocks appear to be undervalued.

Written By

Mark Story

Editor

Mark is an investigative financial journalist and editor who started his career working for Marathon Oil in London. He has a degree in politics/economics and a diploma in journalism. Mark has worked on 70-plus newspapers and financial publications across Australia, NZ, the US, and Asia including: The Australian Financial Review, Money Magazine, Australian Property Investor and Finance Asia. Mark is passionate about improving the financial literacy of all Australians through the highest quality content. Email Mark at [email protected].

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