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Broker thinks this ASX fintech share could go 15% higher. Should you buy?

The Tyro Payments Ltd (ASX: TYR) share price closed 1.7% higher at $3.56 on Friday afternoon.

Tyro is a technology-focused company providing Australian businesses with payment solutions and value-adding business banking products. The company had more than 29,000 Australia merchants in FY19 and processed more than $17.5bn in transaction value. This places Tyro as Australia’s fifth largest merchant acquiring bank by number of terminals in the market, behind the four major ASX banks.

Tyro debuted on the ASX on December 6, 2019, at an offer price of $2.65 per share with a market capitalisation of approximately $1.32bn at the offer price. Investors would have gained a solid 34% had they participated in the IPO.

Broker bullish on the payments sector

Morgan Stanley has given Tyro an “Overweight” stock rating with a price target of $4.15, representing 17% upside against today’s prices. The report described Tyro as an Australia-only, merchant acquirer business, competing mostly against the big 4 traditional Australian banks. Both globally and in Australia, payments is an attractive structural growth story.

Morgan Stanley highlighted major positives such as the structural growth story of card payments, driven by a transition from cash-to-card, mobile and e-commerce trends. The industry tailwind is expected to grow the sector by 7% per annum. It described Tyro as one that is “still a small player (~4% share of the total market) and a disruptor, winning share from banks.” and that “its competitive advantage comes from its focus on SME customers, use of technology and superior customer service”.

Financials and revenue

Tyro generates its income through a variety of sources:

  • Payments revenue and income: which includes merchant services fees, terminal rental income and other fee income
  • Lending income: which primarily consists of interest earned on merchant cash advances
  • Investments income: which includes interest income from investors

In FY19 the company generated a pro forma historical revenue and income of $189.7m, representing a 28% increase on FY18. However, Tyro still reported a net loss after tax of $18.67m for FY19. Morgan Stanley does not anticipate that Tyro will be profitable in 2020-21 as the business will require further scale of customers and/or revenues to cover its significant investment in technology and people.

Moving into 2020, Tyro forecasts approximately $240.6m in revenue or a 27% increase on FY19. Net losses will remain around the same level at $19.25m.

Foolish Takeaway

The market appears to be excited about Tyro’s IPO as the share price rocketed on its debut. Morgan Stanley is bullish on the payments space and Tyro is another ASX fintech player taking market share away from the big 4 banks.

I am cautiously bullish about the Tyro share price moving forward as it has consolidated around the $3.50 level. In the long-term, the market needs to see how Tyro will innovate and scale its revenue to profitability.

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Motley Fool contributor Lina Lim has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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