A testing time looms for Tyro and its executives

Tyro shareholders – including Mike Cannon-Brookes – will be demanding clear answers about the company’s earnings prospects​.

Investors, including representatives for Mike Cannon-Brookes, will have some curly questions lined up for Tyro’s chief executive, Jon Davey, on Friday.

He will front a key Tyro shareholder webinar flanked by chairman Fiona Pak-Poy and finance chief Prav Pala, as banking markets globally are reeling from bank collapses in the US and investor jitters surrounding Credit Suisse’s ongoing viability.

Ahead of the Tyro webinar, it’s worth unpacking the company’s arguments for spurning the most recent private equity led bid and how it plans to navigate 2023.

Long-suffering shareholders – including Cannon-Brookes – will be demanding clear answers around the company’s earnings prospects and why it knocked back a takeover offer by Potentia pitched at $1.60 per share.

To understand the full picture it’s worth going back a few steps to when Tyro started life as a listed company.

The eftpos and payments firm joined the ASX in late 2019 at an initial public offering price of $2.75 per share. The stock rallied as high as $4.49, ahead of Covid-19 and operational issues surfacing in 2020, but it has spent all of this year below $2. On Thursday, Tyro’s shares dipped 0.7 per cent to $1.45.

Potentia was offered due diligence in January and that process – on a non-exclusive basis – commenced the following month. It was ruled off last week, but a binding and improved bid has not been forthcoming as yet.

A letter to investors earlier this month Tyro’s board reiterated the bid “significantly undervalued” the company and talked up “attractive growth prospects”. It also highlighted the value of Tyro’s banking licence which the company said was facilitating growth in market share across the payments and business banking areas.

Tyro chief executive Jon Davey.

While these arguments may represent defence tactics 101, it’s a bit rich for Tyro to be calling out the banking licence as a notable growth lever.

While it does have ambitions to markedly grow banking income, Tyro’s interim accounts show banking revenue in the six months ended December 31 was just $4.5m, up from $2.6m in the year earlier period.

Its mainstay payments unit booked interim revenue of $209.4m, up from almost $146m in the prior corresponding period.

Tyro carried $44.5m of loans in the balance sheet as at December 31 and its deposit book was $95m.

Tyro is also making these points as the banking sector readies for an increase in loan defaults as interest rate hikes continue in 2023 and cost of living pressures also bite consumers.

The company’s first-half results showed lending losses ticked up to 1.2 per cent of originations from 0.3 per cent in the year-earlier period. While the numbers are not startling, it’s important to note those losses don’t reflect this year’s rate hikes by the Reserve Bank and the economy is tipped to slow this year.

It’s also worth remembering that Westpac retreated in December from plans to make a tilt for Tyro, after conducting a period of due diligence. The bank said submitting an offer was “not in the best interests of Westpac shareholders”.

Tyro was granted a banking licence in 2015, albeit it took some time to diversify beyond payments into banking and lending products.

More broadly, Tyro has certainly endured a testing period including a highly-damaging technology outage in early 2021. Davey has only helmed the company since October, while David Thodey stepped down as chairman early this month after announcing his intention to step down in November and “take up new opportunities”.

The onus is now on the new chair and management to make clear their strategy and how it serves as a better option than selling to private equity.

According to Bloomberg, of 10 analysts that cover the stock four rate it a buy, three a hold and the same number a sell.

Jefferies analyst John Campbell has said barring a recession in Australia or a dramatic drop in consumer spending he expects Tyro to navigate the tougher environment. But he highlighted lending losses as a negative for the company.

Campbell also believes the stock is expensive, noting that absent acquisition interest from potential suitors Tyro would likely trade closer to his $1.25 price target.

Current global ructions in the US banking sector, including the collapse of Silicon Valley Bank, are proving problematic for small banks. SVB came unstuck due to ill-time bond investments and an overconcentration in the start-up sector.

Investors may want more detail on Friday around Tyro’s small business sectoral exposures and funding profile.

Rental blues

The RBA’s bulletin on Thursday made clear the crisis engulfing the nation’s renters after large price increases coupled with cost of living pressures across areas including food and energy.

“For some renters, strong growth in incomes will have helped limit the deterioration in housing affordability, although there will be others who will struggle to afford the rent increases,” the RBA said.

“This suggests that affordability will have worsened for some renters, and, in combination with other rising cost-of-living pressures, this is likely to be contributing to financial stress.”

The analysis showed one third of all households rent and that share has risen over the past few decades.

With home ownership becoming more difficult for younger cohorts after interest rates have risen in 10 consecutive moves since May 2022, the gulf between the financial position of renters versus homeowners is only worsening.

“The dollar gap between renters’ wealth and that of owner-occupiers has increased over the past two decades,” the RBA said.