Investors have punched a hole in the market worth of listed merchant services provider Tyro Payments after the company reported a big slide in its bottom line performance for the December half.
Tyro scrip on Monday slumped to its lowest valuation since the peak of the Covid-induced market meltdown in March 2020, as local investors struggled to digest a fivefold increase in the company’s first half loss to A$18 million.
The share price was hammered for most of the day and closed down 56 cents or 26 per cent to $1.62.
Tyro scrip is now trading at a 63 per cent discount to its 12-month high of $4.39 recorded in late September.
While Tyro generated a 30 per cent increase in revenue growth during the half, it also incurred disproportionate increases in one-off and ongoing operating costs.
Broking analysts attributed the share price pummelling to the cost blowouts.
Tyro’s normalised operating costs soared by 24 per cent to $65 million.
This figure excluded special items such as the $4.4 million profit share commission paid to Bendigo Bank for migrating its merchant customer base to Tyro during the period.
Managing director Robbie Cooke focused most of his commentary on merchant acquisition and top-line revenue growth during the half, but it was not enough to assuage the sentiment of spooked investors.
“While lower than the first half last year, our positive EBITDA result of $2.8 million reflected our continued investment in growth initiatives, the absence of JobKeeper benefits, wage inflation and first time costs associated with our newly acquired Medipass operation,” he said.
“Our start to the second half has seen our strong momentum continue.
“Lockdowns abating along with government and business encouraging a return of workers to the nation’s CBDs, provide a positive outlook for our predominantly card present payments operation.”
Cooke indicated that cost pressures were expected to linger in the current half, with salary increases for technology staff likely to average between four and five per cent across the organisation.
Any improvement in Tyro’s operating performance in the second half will depend partly on its ability reprice service fees and terminal rents it levies on customers.
The company came under margin pressure in the December half following a decision to delay passing on price increases to retailers and other merchants during the pandemic.
Moves last year by global card schemes to increase scheme fees that are being absorbed by Tyro were not yet reflected in the prices levied on 61,500 merchant customers.
As a result, Cooke revealed that Tyro had suffered a 3.8 basis point decline in its gross profit margin to 41 basis points.
Analysts believe the company has room to continue winning share from the major banks in the merchant services market while also expanding margins to generate returns for shareholders.
That’s because banks such as CBA and Westpac have adopted controversial new pricing strategies that are raising the costs borne by merchants for accepting debit card payments.
Under a new pricing plan announced by Westpac on Monday, merchants are set to pay 1.2 per cent on debit card transactions whereas Tyro customers currently get the same service at half the cost.
Tyro’s business model is highly exposed to over-the-counter card transactions, which makes the subsidence of the virus critical for the company’s immediate earnings prospects.
In normal times, Tyro’s profit margins are enhanced by the processing of transactions conducted on foreign-issued credit cards because they attract higher fees.
The removal of restrictions on foreign travel into Australia is likely to result in a recovery in such transactions and associated profit margins in the current half.
However, the big share price hit on Monday was also attributable to investor concerns that Tyro’s business model – focused on instore card transactions – was strategically exposed to emerging existential threats such as Apple’s planned global entry into merchant services and the imminent launch of the NPP’s Pay To platform.
Broking analysts probed Cooke on the future impact of PayTo on Tyro’s transaction volumes at an online briefing.
The Tyro chief’s response was that the company had not yet made an assessment of what PayTo’s impact would be.