Tyro (ASX: TYR) is an ASX-listed payment terminal operator recently in the news because a large number of their payment terminals were “bricked”. This saw the Tyro share price crater from around $3.30 to below $2.30. At the same time, this incident has caused customers big problems, leading to brand damage of unknown proportions. The share price last closed at $2.90.
By way of background, Tyro was floated with much fanfare just before the pandemic hit in December 2019. Around $177m from the capital raising went directly to existing shareholders selling shares, while another $125m worth of new shares were issued at the Tyro IPO price of $2.75.
Tyro (ASX: TYR) Bricking Incident
Note: Bricking means the tyro terminals stopped working and could not be fixed remotely.
Since then, the March sell-off saw shares drop to about $1, before rebounding to $3.30 just before the bricking incident. As of today, Tyro says that 85% of Merchants have all their terminals active, and that “based on the quantity of terminals being collected daily, and the time taken to return repaired units to merchants, Tyro expects to have the incident resolved by the end of the week.”
Obviously, this repair and replace process will be costly. Beyond that, it’s worth considering any potential for damages owed by Tyro to its customers, and also by suppliers to Tyro. I’m not sure the answer to these questions, and I’m not sure anyone is.
The Future For The Tyro Brand
The bigger issue for me is whether Tyro looks like a future winner, and how the bad publicity associated with this bricking incident is going to be on its brand going forward. As I understand it, the main selling point for Tyro is that it is a lower cost competitor to the big four banks. It’s a minnow taking market share; and for good reason. Many merchants have found that using Tyro simply saves money for a variety of reasons. For example, Tyro automatically optimises whether a transaction is credit card or debit card in order to reduce costs to the merchant. Alas, despite these positive points, the company remains unprofitable. Indeed, its IPO was priced at 12x “gross profit”, rather than a multiple of real profit.
Tyro Shares As Bank Shares
Its 2020 Annual Report boasts of its ability to lend money — far more in keeping with a bank than a software company — and boasts that it was the largest ASX IPO in 2019.
Now, to my mind these are signs that the IPO was mis-priced to the upside. You don’t have to be particularly skeptical to ask whether Tyro should be priced like a bank (on a multiple of earnings and a dividend yield, rather than anything else). And the fact that the stock remains at roughly 5% above the IPO after the biggest yolo world markets have ever seen supports that; for now.
I suspect that recent buyers are betting that the share price will rebound to the “pre-bricking” price of $3.30; and maybe to continue a growth trajectory from there. From the current share price of $2.90, that leaves just 14% further upside in the “catch the falling knife” trade.
But how likely is that?
Even at the current price of $2.90, Tyro has a market cap of over $1.5 billion once you consider in-the-money options. For this price tag, shareholders can expect no profits, or dividends, but the allure of gross profit of $93.5 million, up just 12.5% on FY 2019. For the sake of this (generous) analysis, lets assume that Tyro’s ex-covid growth rate is closer to 20% per annum.
In this market, any growth stock can trade high. So I would not bet against Tyro shares. But that doesn’t mean it’s priced cheap. It just means Tyro can go higher from here.
Now, I am not willing to treat Tyro as a software company and value it on gross profit (as a proxy for software revenue). I think that is too generous for a business that is largely a re-seller of hardware. As we have seen, this creates a logistical cost as well as a capital cost.
But even if we pretend that Tyro’s gross profit is roughly analogous to a software company’s software as a service, you would find the current multiple uninspiring, given the current market cap is about 16 times gross profit. That doesn’t seem particularly cheap for a loss making company with fairly modest growth.
Equally, that is not to say I’m against the company. It is a large established challenger brand that seems to be able to take share from the oligopoly banks. It’s not hard to believe a focus on certain merchants could create a better product fit. It’s not difficult to believe that they could make a profit on slimmer margins. Importantly, I do not think Tyro’s bricking incident will be the end of the company. Far from it; the real threat here is price competition from the big four banks. The sales proposition to customers is dollar savings. That will persist for many despite the palpable mismanagement that has lead to the bricking incident.
On the other hand, it is hard to believe growth will get easier from here. As we have seen with BNPL stocks, the payments space is relatively fast changing and it’s not clear what moat Tyro has, other than sufficient scale to be in the game.
What Could Make The Tyro Share Price More Attractive?
Please remember the content on this website is not financial advice, and our disclaimer is here. This is merely a reflection on how the business could, in my view, improve prospects from here.
I don’t have a view on Tyro long term from current prices, because I don’t have enough information to make up my mind. Even if it could turn 25% of gross profit into actual statutory profit, it would only make $45 million in profit if the business doubled in size. That would put it on a P/E of around 33 at current prices; potentially interesting, but requiring bullish growth forecasts.
Rather than make optimistic future projections, the kind of scenario I would be looking for is something like this:
- The heat comes out of the stock, even while its metrics improve.
- A statutory profit occurs, giving confidence around how to value the business.
- Board holds Tyro CEO Robert Cooke to account; new CEO installed with a requirement to prioritise continuity of service to merchants — or be sacked.
I have no position in Tyro. I’m not short the stock, nor would I want to be, because I think it can definitely recover from the current situation. On the other hand, I’ve little interest in playing the “sentiment rebound” on a brand-damaging operational disaster, given that the company is not yet profitable, and the management so well paid.
Tyro CEO Robert Michael Sean Cooke Paid $2.2 Million
Finally, I note that Tyro (ASX: TYR) CEO Robbie Cooke was paid $2.2 million total remuneration in FY 2020. Even a biased simpleton could figure out that this is a rough deal for shareholders compared to the pay at some other, higher performing ASX companies.
For example, one profitable, dividend paying medical imaging software company I own shares in, with approximately twice the market cap of Tyro paid its CEO total remuneration of just over $500,000 in FY 2020, despite strong operational performance, setting the stage for all time highs as I write this.
Another software company I own, with a market capitalisation of about half the market cap of Tyro paid its long-serving CEO paid its CEO just over $300,000, despite stellar share price and business performance. It is also sitting near all time highs.
To ensure continuity of service to customers is the number one responsibility of the Tyro CEO, Robert Cooke. We are about to see whether the board of directors is inclined to hold management to account. If a senior engineer is blamed for this incident; or if no-one takes the blame for this incident, then, in my opinion, we have irrefutable proof that the company falls short of my standards of performance accountability. Why would shareholders want to create the precedent that a CEO can preside over a disaster of this magnitude and remain in the role.
Unfortunately, most analysts covering Tyro lack the ability to point out Tyro is shovelling remuneration into the CEO’s pocket at a rate far higher than larger, better performing companies do. The reason for this is they are afraid they will lose access to management.
But even if Tyro goes on to be a winner, I will not regret focussing my attentions on companies that have stronger operational performance with more modest management pay.
Disclosure: I own shares in the two un-named companies referenced above, none of this article is intended to be financial advice, and the information is general in nature.
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