Tyro Payments: Gross profit underwhelms during update

About the author:

Richard Coles
Author name:
By Richard Coles
Job title:
Senior Analyst
Date posted:
04 November 2021, 8:30 AM
Sectors Covered:
Insurance, Diversified Financials

  • Tyro Payments (ASX:TYR) has provided a trading update as part of its AGM.
  • The stock fell heavily on an apparent large gap between transaction growth and gross profit (GP) growth YTD to October (25% vs 14% on pcp). However, management later clarified this gap as stemming from the way it is disclosing the impacts of the Bendigo Bank Alliance (with the gap heavily reduced on a statutory reporting basis).
  • Nevertheless, with an October YTD gross profit (GP) of ~A$38.5m, the FY22 consensus GP of A$159m is arguably a stretch, in our view, even noting the ability of TYR to ramp up significantly post lockdowns ending.
  • We downgrade our TYR FY22F/FY23F EPS by >10%, both off relatively low bases. Our price target is reduced to (login to view).
  • We continue to like the TYR story long-term with the company retaining a significant growth pathway, and with further benefits of leverage to come over time. With TYR now trading at a ~23% discount to our price target (login to view), we maintain our ADD call.

Event

TYR has provided a trading update as part of its AGM.

TYR has consistently given weekly transaction value updates so the October YTD transaction figure of A$8.97bn, up 25% on pcp (A$7.16bn), was no surprise. 

However, the market sold off the stock heavily on TYR disclosing its gross profit (GP) at the October end being $38.5m, up 14% on pcp (A$33.8m), a growth rate well below transaction value growth (~25% on pcp). 

Management later clarified that the group GP, as disclosed at the AGM, had been reduced by the Bendigo Bank Alliance revenue share, resulting in the variance between transaction value growth and GP growth.

TYR said on a statutory reporting basis, where the revenue share is not deducted from GP (but amortised in the Groups’ depreciation and amortisation expense), the reported group GP would have been A$41.2m, up 22% on the comparable GP in pcp (A$33.8m). 

TYR indicated to Morgans broadly, that it has not seen any discernible impact on margins from any change in the current competitive environment in recent months.

Key thoughts

TYR’s explanation removes the initial concerns about the disparity between transaction growth and GP growth.

Still, with the FY22 Factset consensus GP at A$159m vs TYR’s A$38.5m October YTD performance, arguably this target looks like a stretch, in our view.

This is even acknowledging the ability of TYR to ramp up quickly with lockdowns now easing. This ability was highlighted in the prior year, where TYR earned 45% of its 1H21 GP in the last two months of the half as lockdowns ended (A$27.4m in November/December vs A$33.8m in July to end of October).

Forecast and valuation update

We downgrade our TYR FY22F/FY23F EPS by >10%, both off relatively low bases. Our PT is lowered to (login to view).

Investment view

We continue to like the TYR story with the company retaining a clear long-term growth pathway, and with further benefits of leverage to flow over time. We think TYR going EBITDA positive in FY21 has also significantly de-risked the story.

We see today’s large share price pull back as overdone, and with the stock trading at a ~23% discount to our PT, we maintain our ADD call.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.


Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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