Tyro Payments has undergone a remarkable financial transformation, successfully pivoting from growth-focused operations to sustainable profitability. The company delivered exceptional FY24 results with statutory net profit quadrupling to $25.7 million and free cash flow increasing five-fold to $30.4 million. This momentum continued in H1 FY25, with EBITDA growing 20.6% to $33.0 million and margin expansion to 29.5%.

The strategic shift toward vertical specialization has yielded significant benefits, particularly in the Health segment which continues to outperform with 16.2% transaction value growth in H1 FY25 despite challenging macroeconomic conditions. The integrated banking strategy is gaining traction, with banking users growing 34% in H1 FY25 and generating 1.3x the gross profit of payments-only merchants.

Management has provided clear guidance for FY25, targeting gross profit between $218-226 million and an EBITDA margin of approximately 28%. The company's commitment to the "Rule of 40" from FY26 onwards establishes accountability for balancing growth and profitability. With plans to enter two new verticals in FY25 and continued banking integration, Tyro is well-positioned to capitalize on its competitive advantages while navigating near-term economic headwinds.

Tyro Payments Limited is an Australian fintech company providing payment processing, banking services, and lending solutions to over 73,000 merchants across Australia. Founded in 2003, Tyro became Australia's first new entrant into the EFTPOS market in over a decade and achieved a significant milestone in 2016 by becoming the first technology company to obtain a full Australian banking license as an Authorised Deposit-taking Institution (ADI).

The company generates revenue through multiple streams, with merchant service fees forming the core business. Additional revenue comes from terminal rental, interest on merchant loans, banking services, and value-added solutions. In FY24, Tyro processed $42.9 billion in transaction value, generating $471.4 million in normalized revenue and $210.8 million in gross profit.

Tyro's primary customers are small and medium-sized enterprises across four key verticals: hospitality, retail, services, and health. The Health vertical has been particularly strong, with the company leveraging its specialized capabilities to deliver consistent outperformance even in challenging market conditions.

Tyro's H1 FY25 results reinforced the sustainability of its profitability transformation, with gross profit growing 6.5% to $112.0 million despite modest transaction value growth. The standout performance was EBITDA growth of 20.6% to $33.0 million, driving margin expansion to 29.5% - a significant improvement from 26.0% in the prior period.

Segment performance showed continued divergence, with the Health vertical delivering exceptional 16.2% transaction value growth while the broader Tyro Core business grew just 0.3%. The Bendigo Alliance continued to face challenges with volumes declining 10.7%, though pricing initiatives helped moderate the gross profit impact. Banking segment momentum accelerated with users growing 34%, up from 27% in FY24.

The results validate management's strategic focus on profitable growth over pure volume expansion. Operating expenses were well-controlled, growing modestly while gross profit increased, demonstrating operational leverage. The company maintained a strong balance sheet with a capital adequacy ratio of 73% as of December 2024, providing flexibility for growth investments and potential capital returns.

Our financial forecasts reflect Tyro's strategic transition to profitable growth, with revenue growth projected at 5.0% in FY25, gradually accelerating to 8.3% by FY29 as new vertical initiatives mature and integrated banking adoption increases. This growth trajectory acknowledges near-term macroeconomic headwinds while recognizing structural advantages in Tyro's vertical specialization strategy.

The most notable aspect of our forecast is the EBITDA margin expansion trajectory from 28.0% in FY25 to 32.5% by FY29, aligned with management's explicit targets and supported by the company's track record of margin improvement. This progression translates to EBITDA growing significantly faster than revenue, with projections showing an EBITDA CAGR of approximately 14% over the forecast period.

Capital expenditures are projected at approximately 4.3% of revenue, primarily for terminal fleet investments, while working capital requirements remain minimal due to Tyro's asset-light business model. The forecast assumes continued strong banking user growth of 25-30% annually, critical as banking users generate superior unit economics.

Our valuation analysis employs multiple methodologies to triangulate Tyro's fair value, with DCF as the primary approach given the company's improving cash flow profile and visible growth trajectory. The DCF base case of $1.13 per share represents our central estimate, balancing Tyro's demonstrated profitability improvements against competitive and macroeconomic challenges.

The valuation incorporates a WACC of 13.6%, reflecting Tyro's risk profile as a fintech company with demonstrated improving profitability but facing competitive and macroeconomic uncertainties. Terminal growth is set at 3.2%, reflecting long-term Australian GDP plus inflation, moderated for sector maturity and competitive dynamics.

Market-based approaches provide supporting evidence for our DCF valuation, with EV/EBITDA multiples suggesting potentially greater upside if Tyro continues executing on profitability improvements. The current share price of $0.93 sits below our valuation range, suggesting undervaluation of approximately 21.5% to our base case.

The primary risk exposure stems from challenging Australian economic conditions characterized by persistent inflation and elevated interest rates. These conditions have created elevated merchant churn and reduced transaction volumes in discretionary verticals. However, Tyro's strategic focus on non-discretionary segments like Health, combined with its integrated banking proposition, provides meaningful mitigation against these external pressures.