Morgan Stanley Valuation

Tyro Payments Ltd (TYR)Stock rating: OverweightPrice target: A$4.70Morgan Stanley sees continuing structural growth in consumer payments switching to digital (i.e. replacing the use of cash). We forecast TYR to continue to make further market share gains (currently only ~5% share), predominantly taking Small Medium Enterprise (SME) customers from the major banks, underpinned by TYR’s faster, more efficient, and more flexible payments platform. In addition, we believe the market is under-estimating the upside from TYR’s acquisition of Bendigo Bank’s SME payments customers in June 2021. We also see upcoming new hardware launches (new dongle and mPOS) as drivers of TYR share gains.

Morgan Stanley’s bull case scenario will come into play if TYR is able to secure another outsourcing deal with another Australian regional bank or large bank, along the lines of the Bendigo Bank deal. We expect this would be highly value-enhancing as it would add TTV volume to the platform and likely be meaningfully additive to TYR’s margins and returns. Currently, TYR is trading on an ~11x FY21 EV/Sales, which is below its historic average of 13x and below Australian software peers of 10x-25x. This valuation is particularly attractive given we expect an acceleration in revenue growth as NSW and VIC emerge from lockdowns and consumers return to previous spending patterns in hospitality and retail. The next catalyst is likely TYR’s 2021 AGM scheduled on 3 November 2021 (see Tyro Payments Ltd, TYR FY21 results in-line…positive news on lower churn + rising new applications + good start to BEN JV + new hardware coming. Keep OW, 26 Aug 2021).