Tyro Payments Earnings: Positive Operating Leverage Is Evident

We maintain our AUD 2.60 per share fair value estimate for no-moat Tyro TYR. 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.

Notably, Tyro expects a stronger fiscal 2024 than our prior forecasts. Guided transaction volumes, gross profits, and EBITDA beat our projections by 11%, 15%, and more than 100%, respectively. Business fundamentals appear to be improving at a swifter pace than we initially expected, and the expected consumer spending downturn has yet to eventuate. Our unchanged fair value accounts for an increase in near-term volumes and slightly reduced operating expenses, offset by more modest medium-term volume growth and higher processing costs. Our fiscal 2024 forecasts are at the low end of guidance as we expect consumer spending to soften. While aggregate transaction volumes should increase, we see volumes per merchant declining and bad debts rising from fiscal 2023 levels.

Tyro is undervalued. Economic headwinds aside, we expect market share gains, operating cost control, and gradual savings in variable costs to drive profit and free cash flow growth from fiscal 2024 onward. We forecast underlying NPAT growing at 27% CAGR over the five years to fiscal 2028, off a low base in fiscal 2023. Further share gains are likely from expanding its merchant categories, rollouts, and adoption of new products, and more large-scale partnerships. Cost-outs are targeted at noncore functions and are unlikely to impinge on Tyro’s core offering. New merchant applications continue to grow, despite cost reductions and competition from major banks and Square.