Banking Integration And Health Sector Expansion Will Shape Future Prospects Amid Challenges

Key Takeaways

• Tyro's focus on integrated payments and modernizing its terminal fleet aims to capture a larger card payment market and enhance customer retention.
  
• Strong growth in health transactions and improved bank integration present cross-selling opportunities, boosting margins and long-term profitability.
  
• Rising churn, dependence on healthcare, transition risks, competition pressures, and regulatory changes threaten transaction volumes, revenue growth, and net margins for Tyro Payments.

Catalysts

Engages in the provision of payment solutions to merchants in Australia.

• Tyro Payments is investing heavily in its payments infrastructure, particularly in integrated payments and banking, which includes partnerships with 700 software partners and an investment in modern banking infrastructure. This is expected to improve revenue by enabling access to a larger portion of the $1 trillion in Australian card payments.
  
• The company is modernizing its payment terminal fleet with next-generation devices like Tyro Pro and Pro Key, designed specifically for growing sectors such as Health, which can drive future revenue growth through capturing larger market share and improving customer retention.
  
• Tyro Health is experiencing significant growth with a $7 billion transaction value run rate and has focused on expanding its market share through innovative solutions, which will likely enhance revenue growth through increased transaction volumes in the health sector.
  
• Tyro's banking integration strategy shows positive momentum, with growth in bank account and loan origination volumes, suggesting an increasing cross-sell opportunity. This will improve net margins and potentially drive earnings growth as these services are typically higher margin.
  
• The leadership team's focus on cost management and operational efficiency has led to a consistent reduction in operating expenses as a percentage of gross profit, which should help sustain increased EBITDA margins and drive profitability moving forward.

Tyro Payments Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Tyro Payments's revenue will grow by 2.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 6.1% today to 4.1% in 3 years time.
• Analysts expect earnings to reach A$22.9 million (and earnings per share of A$0.04) by about March 2028, down from A$30.8 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$41.1 million in earnings, and the most bearish expecting A$14.0 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 37.6x on those 2028 earnings, up from 12.6x today. This future PE is greater than the current PE for the AU Diversified Financial industry at 16.8x.
• Analysts expect the number of shares outstanding to decline by 0.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.06%, as per the Simply Wall St company report.

Tyro Payments Future Earnings Per Share Growth

Risks

• The increasing churn rate, particularly in discretionary segments like Retail and Hospitality, and higher-than-historical averages, could signal potential weaknesses in customer retention, impacting future transaction volumes and revenue.
  
• The financial dependence on Health sector growth poses risks due to its relatively low market share, which may limit the ability to sustain outpacing sector growth, thus affecting overall revenue growth projections.
  
• The transition to a Banking-as-a-Service model with third-party provider Constantinople introduces execution risks and potential cost inefficiencies, which could impact net margins and profitability.
  
• Competitive pressures and macroeconomic challenges causing lower consumer spending and business closures in discretionary areas like Retail and Hospitality may further depress transaction volumes and revenue growth.
  
• Potential impacts from regulatory changes, such as surcharging bans, may necessitate adjustments to pricing structures and business models, possibly affecting revenue streams and profit margins if the company cannot adequately adapt.

Valuation

• The analysts have a consensus price target of A$1.341 for Tyro Payments based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$1.65, and the most bearish reporting a price target of just A$0.82.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$553.8 million, earnings will come to A$22.9 million, and it would be trading on a PE ratio of 37.6x, assuming you use a discount rate of 7.1%.
• Given the current share price of A$0.74, the analyst price target of A$1.34 is 44.8% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.