Shareholders in ASX debutant Tyro Payments Ltd (ASX: TYR) have new reason to cheer after Morgan Stanley initiated coverage on the stock with an "overweight" (or "buy") recommendation on the payment disruptor.
The Tyro share price jumped 1.6% in lunch time trade to $3.48 when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index inched up 0.3%.
This takes Tyro's gain to nearly 27% above its initial public offer price of $2.75. Not a bad gain for those who subscribed for the new stock, which listed in early last month.
In the right spotlight
It's perhaps to surprise that fellow payment company EML Payments Ltd (ASX: EML) is also shooting the lights out. New payment technology is a hot space for investors at the moment – just ask Afterpay Ltd (ASX: APT).
There could be more gains in the wings for Tyro, at least according to Morgan Stanley as it lists a price target of $4.15 on the stock.
But one shouldn't be too surprised that Morgan Stanley is such a big cheerleader for the company. After all, the broker was a joint lead manger with JP Morgan for Tyro's IPO.
It would be a bad look for Morgan Stanley to rate the stock anything but a buy!
Structural growth
This factoid aside, the broker believes Tyro is a structural growth story. Tyro only operates in Australia and electronic payments in this country are increasing by around 7% a year.
In an environment where earnings growth is hard to come by, this makes Tyro an appealing story – provided the disruptor can continue to steal market share from the big banks and other competitors.
"We estimate this generates a revenue pool of merchant fees paid ~A$6.1bn p.a., or a net A$2.3bn (after interchange fees) for which TYR can compete," said Morgan Stanley.
"Although operating for more than a decade, TYR is still a small player (~4% share of total market) and a disruptor, winning share from banks.
"We note global merchant acquirer peers generate attractive returns, most achieve EBITDA margins of 20-60%."
No profit, no problem
But don't expect the emerging player to post a profit for a while. Even at the earnings before interest, tax, depreciation and amortisation (EBITDA) level, Tyro isn't tipped to post a positive result until sometime after FY21.
The good news is that the lack of profits hasn't stopped the likes of Afterpay from surging around 150% over the past year. Tyro could join the same parade although it's reach isn't as geographically extensive.
