Flash the Plastic

Tyro Payments is a pure-play domestic payments company that has a best-in-class payments solution for its core market segments, known as verticals. Tyro has achieved 10% market share in its verticals, and we believe the company is primed to accelerate growth through: 1) further market share gains; 2) expansion into new verticals; and 3) cross-selling opportunities. We recently initiated coverage of the company with an Accumulate recommendation and a target price of $3.75.

 

  • The business – Tyro Payments has built its payments offering from the ground up and offers the best-in-class solution for merchants in its core verticals. This is due largely to the deep integration between Tyro’s terminals and point-of-sale systems, as well as the speed and stability of its payments network. This has driven a five-year FY14–19 merchant compound annual growth rate of 23%. We expect this 20%-plus year-on-year growth to continue and accelerate in the medium term, particularly given Tyro’s intention to enter new verticals.

     

  • Industry backdrop – Tyro’s market-share gains have come at a cost to its major competitors (the big four banks), which have ceded market share in Tyro’s verticals due to a number of payment- and non-payment-related issues. As these competitors work to overhaul their payments offerings, we believe now is an opportune time for a fast tech-enabled disruptor to chase market share gains aggressively.

     

  • Product innovation and cross-selling opportunities – Tyro is the fifth-largest merchant acquiring bank, and the growing merchant base represents a captive audience for the company to monetise through the up-selling of payments-related products. This includes Tyro’s full launch of its innovative merchant banking product, which we expect to deliver high incremental margins.

     

  • Valuation – Our December 2020 target price implies an FY20E enterprise value to revenue multiple of 7x and EV to gross profit multiple of 17x, which represent elevated spot multiples. However, our discounted cash flow valuation supports the premium due to the expected high top-line growth and subsequent margin expansion.

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