Tyro Payments: Distinct Investment Merits Despite Potential Revenue Cyclicality

We cut our fair value estimate on no-moat Tyro to AUD 2.00 per share from AUD 2.60. We raise our cost of equity assumption to 9.0%, up from the previous 7.5%. This brings our assumption above Tyro's larger global peers such as Worldline, FIS, and Fiserv. We expect Tyro’s revenue to be more cyclical than global counterparts given greater exposure to small-to-medium enterprises, notably retail and hospitality merchants, which are more discretionary. Its proportion of fixed costs is also higher than peers, which may adversely affect earnings if revenue declines. Operating margins are expected to average 6% over the next five years, below an average of 24% for its larger peers. Given these attributes, we can no longer support our prior assumption of a lower discount rate for Tyro.