Tyro Payments: Top-line growth needs to be balanced with leverage

About the author:

Author name:

By Richard Coles

Job title:

Senior Analyst

Date posted:

22 February 2022, 10:00 AM

Sectors Covered:

Insurance, Diversified Financials

• Tyro Payments’ (ASX:TYR) 1H22 NPAT loss (-A$18m) was below Factset consensus (-A$11m). While 1H22 revenue (A$142m, +30% on pcp) was +5% above market expectations, TYR’s normalised EBITDA (A$2.7m) was comfortably below consensus (~A$5m) and MorgansE (~A$7m).
• Overall, this result disappointed versus expectations primarily due to a softer payments gross profit margin and higher-than-expected operating costs.
• We downgrade our TYR FY22F/FY23F EPS by >50% mainly on reduced EBITDA margin assumptions. Our Price Target is set at (login to view). ADD maintained.

Event

TYR’s 1H22 NPAT loss (-A$18m) was below Factset consensus (-A$11m). While 1H22 revenue (A$142m, +30% on pcp) was +5% above market expectations, TYR’s normalised EBITDA ($2.7m) was comfortably below consensus (A$5m) and MorgansE (~A$7m).

On the payments gross profit margin (ex Bendigo Alliance and Medipass impacts), this declined to 41bp from 44bps in the pcp. TYR attributed this to: 1) the deferring of annual price reviews to assist merchants during Covid-19 lockdowns (2bps); and 2) the impact of tighter pricing for some larger merchants (1bps).

Group operating expenses (ex Bendigo Alliance and Medipass impacts) were up +11% on pcp, driven primarily by higher staffing costs (+56 new staff in core TYR, and impacts of above-inflation pay increases in 2021 to retain key staff), and investment in growth initiatives, e.g. the announced partnership with Telstra, etc.

Key thoughts

Overall TYR’s 1H22 transaction volume growth was robust (+31% on pcp) and February growth rates are tracking at +50% on pcp as Covid-19 lockdowns near an end.

However, while explanations on the softer payments margin and higher-than-expected operating costs made sense, the simple fact is TYR is not delivering the level of operating leverage expected by the market.

This is highlighted by a flat operating expense to gross profit ratio on pcp (93%) and a broadly flat 1H22 EBITDA result on an underlying basis versus pcp (~A$4.5m, ex Medipass and Job Keeper benefits in prior year) despite much higher TYR volumes. 

With merchant support on pricing likely to continue until at least 4Q22, Medipass to remain a 2H22 drag on earnings, and costs linked to higher staff pay and growth investments likely still rolling through, any solid EBITDA margin improvement appears more an FY23 story, in our view. 

We would argue the sell-off in TYR seems overdone with TYR now trading 29% below where it did during the outage incident in early 2021 (A$2.32). However, TYR does seem to lack near-term catalysts for a rebound, with the market seemingly looking through robust top-line volume growth and with doubts about leverage bound to linger until it’s evidenced in reported numbers.

Forecast and valuation update

We downgrade our TYR FY22F/FY23F EPS by >50% in both years, mainly on lower EBITDA margin assumptions. Our Price Target is set at (login to view).

Investment view

With the recent large sell-off occurring in tech stocks, TYR’s result disappointment could not have been more poorly timed. However, we do continue to see the company as retaining a favourable long-term growth story highlighted by current market share gains.

We also expect leverage to ultimately emerge over time and with TYR having over >A$150m of cash and financial investments to support growth, it remains well funded.

Risks

Key risks to our ADD recommendation include; a deterioration in the overall macro environment, competition, inability to expand earnings and cashflow through leverage, the emergence of alternative payment methods, and regulatory risk.

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