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Treasure Chest: Can Tyro Accelerate Growth?

Treasure Chest | Mar 10 2021

This story features TYRO PAYMENTS LIMITED, and other companies. For more info SHARE ANALYSIS: TYR

FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. A key issue for Tyro Payments is whether the acquisition of new merchant customers is gathering pace

-Terminal outage impact less than feared
-New merchant applications key to the outlook
-Margins to improve from changes in card mix


By Eva Brocklehurst

Can Tyro Payments ((TYR)) accelerate its merchant acquisitions and return rates of growth to peak levels? The volume of downloads in the Tyro Payments mobile app for merchant customers has risen in recent weeks, recovering to the levels seen before a terminal outage in January caused a major disruption to the company's business.

Morgan Stanley notes this data coincides with new merchant application growth and estimates the Tyro Payments mobile app has a 30-40% penetration rate amongst its merchant customers.

Hence, weekly app downloads are considered a useful indicator of new merchant acquisitions and critical to the broker's Overweight thesis.

The company provided no explicit guidance at its half-year results, although indicated the impact of the terminal connectivity issue on customer loyalty was generally less than feared.

Costs in the second half are higher as a consequence, yet Goldman Sachs is reassured by the guidance for remediation costs of around $15m. Importantly, churn in January was in line with the average and there may not be a long-lasting impact on future growth.

Moreover, the revenue growth profile could accelerate through 2021 as Victoria and the hospitality vertical return to normal. Revenue and customer growth trends, while lower in January-February than the averages of July-December 2020, are not the signs of a business that is losing market share, Goldman Sachs asserts.

For Macquarie, the main issue is whether new merchant applications are still running substantially below peak levels. The broker notes 599 new applications were made in the first three weeks of February, implying a monthly growth rate of 800-850, which remains -32% below the peak seen in October 2020 and -24% below the pre-pandemic average.

Should this monthly number remain below 1000 in the period ahead of June 2021, Macquarie suspects it will disappoint bullish expectations and signal a more permanent reduction in merchant growth rates.

So, while incrementally more optimistic, the broker continues to envisage risks to merchant growth and retains an Underperform rating. Until the full year results, Macquarie believes weekly total transaction value (TTV) updates are the catalyst and should this data set improve it would provide the upside risk necessary to change its view.

In contrast, Ord Minnett has renewed confidence that the impact of the January outage has been contained and merchant acquisitions are starting to get back on track, lifting its recommendation to Buy from Accumulate.

The outage was significant in that it affected around 30% of the company's merchants but the broker points out other merchant acquirers have had similar issues over the past five years so this event was not unique to Tyro Payments.

Ord Minnett assesses the offer is compelling for small and medium-sized enterprises and market share growth should continue. Moreover, elevated merchant-acquiring margins are expected to improve as a result of the change in card mix.

Debit cards now account for around 60% of transactions and international cards are decreasing to less than 1%. Amid restrictions on international travel and a broader trend to debit cards, Ord Minnett expects the trend towards debit cards will continue to the end of FY21 before normalising.

Goldman Sachs, too, acknowledges it underestimated the earnings benefit from the mix shift to debit cards and this is a structural trend that is unlikely to abate. Debit card volumes are the company's most profitable payment units and as a result of the structural migration the broker believes the impact on profit margins is likely to be sustainable.

Goldman Sachs has upgraded to Buy from Neutral and, not one of the seven stockbrokers monitored on the FNArena database, maintains a target of $3.70.

Morgan Stanley notes risks to the upside include another deal similar to the one with Bendigo & Adelaide Bank ((BEN)) along with expansion into new verticals. Pre-integration activities are on track for this alliance and commercial completion is expected by the end of the second half.

On the other hand, further terminal failures or a failure to take market share from the large four banks are risks to the downside. The database has two Buy ratings and one Sell (Macquarie). The consensus target is $3.75, suggesting 16.5% upside to the last share price. Targets range from $2.65 (Macquarie) to $4.50 (Ord Minnett).

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