Small Caps | Oct 19 2020
This story features BENDIGO & ADELAIDE BANK LIMITED, and other companies. For more info SHARE ANALYSIS: BEN
Tyro Payments has brokered an alliance with Bendigo and Adelaide Bank to provide merchant acquiring services thereby lifting its profile, particularly in Victoria.
-Deal demonstrates operating leverage from higher payment volumes
-Higher market share for Tyro Payments in Victoria
-Suncorp the most obvious candidate for similar arrangements
By Eva Brocklehurst
The company has entered an exclusive alliance with the bank to provide merchant acquiring services to current and referred customers. To Goldman Sachs the transaction demonstrates the operating leverage that can occur from higher payment volumes, given relatively modest incremental costs.
Bendigo and Adelaide has been losing market share in this segment, with a probable inability to provide bespoke solutions for its merchant network as it relies on multiple third-party software solutions. Hence, Goldman Sachs believes the alliance will be mutually beneficial.
The transaction should be materially accretive to earnings in FY22, on Ord Minnett's estimates. The 10-year alliance has five-year options. Under the deal Bendigo and Adelaide will experience a full separation of its existing merchant acquiring services.
Tyro will pay $9m up front, with $20m one-off costs, with an ongoing gross profit share from existing and newly referred bank business customers that use the merchant acquiring services. The company expects to roll out 26,000 terminals and generate $5bn of annual transaction value, with gross profit of $19m and additional ongoing costs of $6.7m per annum.
Morgan Stanley is positive about the development, believing the $5bn in transaction value at scale should lift total transaction value in FY22 by around 20%. The main issue is what will happen to top-line growth after the pandemic fades. Will this return to 20-30% or remain lower? Morgan Stanley suspects it will return to its former strength and this deal should help.
Increases Victorian Presence
Tyro will also obtain a significant market share in Victoria. Goldman Sachs notes the higher exposure of Bendigo and Adelaide to Victoria means it has a much higher rate of currently inactive merchants because of the pandemic.
Ord Minnett agrees Tyro will be positioned to benefit from the re-opening of Victoria as well as the broader economy over FY21. The ability to partner rather than acquire the book is also favourable, given a minimal capital outlay that will add scale to the business.
The deal makes sense to Macquarie, too, and the cost is modest. The transaction should add 13-25c of value per share. The main issue for this broker is the duration of the contract and whether or not the deal is extended indefinitely.
Macquarie recognises the strategic appeal in the alliance but believes the recent re-rating of the stock has already begun to factor in the upside from the re-opening of Victoria. Moreover, the broker is cautious about the risk of elevated churn over coming months.
Goldman Sachs suspects similar arrangements could occur with other financial institutions that are losing share in the payments market as the arrangement protects the banking service relationship for the bank but allows customers to benefit from a specialist payment solution. The broker does not explicitly include any further arrangements for Tyro Payments in its estimates.
Macquarie suggests Suncorp's ((SUN)) bank is the most obvious candidate, with 23,000 terminals. Bank of Queensland ((BOQ)) has previously left the merchant-acquiring segment so it is a less obvious option.
A partnership with a major bank would be a significant development but the broker considers this a much less likely outcome, as the majors would not want to relinquish their customer relationships and the profit share could be far less lucrative for Tyro.
Tyro is the fifth largest merchant acquirer in Australia by number of terminals, and amongst licensed financial institutions the only one that has been growing market share according to Goldman Sachs data.
The broker notes Australian Deposit-taking Institutions (ADIs) have experienced a declining trend, while outsiders such as Tyro Payments have their increased market penetration. Major ADIs have experienced a net reduction in terminals in the market.
Goldman Sachs, not one of the seven stockbrokers monitored daily on the FNArena database, makes no changes to the Neutral rating and raises the target to $3.65. The database has two Buy ratings and one Sell (Macquarie). The consensus target is $4.20, signalling -0.7% downside to the last share price.
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