Company Reports

We maintain our AUD 17.25 per share fair value estimate for wide-moat Pexa following its full-year results. The company reported modest improvements from the prior year, with group margins rising 3 points on a pro forma basis, which includes Smoove, or 2 points, when excluding Smoove. Margins for the Australian Exchange rose 1 point to 55%, despite ongoing investment into the platform.

We expect Pexa’s strategic focus for the foreseeable future to be on its overseas expansion into the United Kingdom. Pexa’s exchange business is mostly saturated in Australia, leaving overseas expansion as the primary driver of growth. However, Pexa does not enjoy an equally supportive environment in the UK as it did in Australia. In Australia, the country's largest banks co-owned it and with a legal mandate from state governments to move to e-conveyancing, this helped drive adoption. Pexa will therefore have to invest heavily into product development, and especially sales and marketing to drive adoption of its platform by sufficient market participants for network effects to kick in.

We maintain our AUD 17.25 per share fair value estimate for wide-moat Pexa, following its third-quarter trading update. The exchange maintained its full-year guidance, which is slightly below our estimates. Specifically, we expected volumes in the Australian housing market to revert to long-term turnover numbers sooner, resulting in more operating leverage. We have adjusted our near-term forecasts and have pushed out market normalization to next year. We think the shares screen as materially undervalued as the market is overly focused on the loss-making United Kingdom business.

We expect Pexa’s strategic focus for the foreseeable future to be on its overseas expansion into the United Kingdom. Pexa’s exchange business is mostly saturated in Australia, leaving overseas expansion as the primary driver of growth. However, Pexa does not enjoy an equally supportive environment in the UK as it did in Australia. In Australia, the country's largest banks co-owned it and with a legal mandate from state governments to move to e-conveyancing, this helped drive adoption. Pexa will therefore have to invest heavily into product development, and especially sales and marketing to drive adoption of its platform by sufficient market participants for network effects to kick in.

Wide-moat Pexa is progressing a partnership with the United Kingdom-based bank NatWest, which will allow NatWest to deliver 48-hour remortgage transactions to its customers using the Pexa platform.

We raise our fair value for wide-moat Pexa by 15% to AUD 17.25 per share. The company provided additional disclosure on a revenue stream that previously flew under the radar and provided updated disclosures around capital expenditures in its exchange business. After incorporating this in our valuation, we raise our stand-alone valuation for the exchange business to AUD 15.50 per share from AUD 13 per share. We ascribe a further AUD 1.75 per share value to the business from Pexa’s international business, based on a 25% probability of success. We do not ascribe value to Pexa’s digital growth business. We think the shares screen as materially undervalued as the market is overly focused on the loss-making UK business.

We expect Pexa’s strategic focus for the foreseeable future to be on its overseas expansion into the United Kingdom. Pexa’s exchange business is mostly saturated in Australia, leaving overseas expansion as the primary driver of growth. However, Pexa does not enjoy an equally supportive environment in the U.K. as it did in Australia. In Australia, the country's largest banks co-owned it and with a legal mandate from state governments to move to e-conveyancing, this helped drive adoption. Pexa will therefore have to invest heavily into product development, and especially sales and marketing to drive adoption of its platform by sufficient market participants for network effects to kick in.

We expect Pexa’s strategic focus for the foreseeable future to be on its overseas expansion into the United Kingdom. Pexa’s exchange business is mostly saturated in Australia, leaving overseas expansion as the primary driver of growth. However, Pexa does not enjoy an equally supportive environment in the U.K. as it did in Australia. In Australia, the country's largest banks co-owned it and with a legal mandate from state governments to move to e-conveyancing, this helped drive adoption. Pexa will therefore have to invest heavily into product development, and especially sales and marketing to drive adoption of its platform by sufficient market participants for network effects to kick in.

We maintain our AUD 15 per share fair value estimate for wide moat Pexa, following the completion of the acquisition of Smoove. Pexa shares have been volatile surrounding updates around the acquisition and currently screen as materially undervalued. We believe Pexa’s core exchange business in Australia is worth AUD 14 per share on a stand-alone basis or AUD 12.50 per share when including net debt. With shares trading at AUD 11.30, we believe the market attributes negative value to Pexa’s expansion in the U.K. market.

We maintain our AUD 15 per share fair value estimate for wide-moat Pexa, following the proposed acquisition of Smoove. After the market digested the announcement, shares fell over 7% the following day. We attribute the fall to a perception of weakness that comes from seemingly being unable to organically enter the market. However, we believe Pexa’s core exchange business in Australia alone is worth AUD 14 per share, or AUD 12.50 per share when including net debt, and don’t believe expansion into the U.K., successful or not, warrants as much of a discount as the market appears to attribute to it. At current prices, we believe Pexa’s shares are materially undervalued.

We expect Pexa’s strategic focus for the foreseeable future to be on its overseas expansion into the United Kingdom. Pexa’s exchange business is mostly saturated in Australia, leaving overseas expansion as the primary driver of growth. However, Pexa does not enjoy an equally supportive environment in the U.K. as it did in Australia. In Australia, the country's largest banks co-owned it and with a legal mandate from state governments to move to e-conveyancing, this helped drive adoption. Pexa will therefore have to invest heavily into product development, and especially sales and marketing to drive adoption of its platform by sufficient market participants for network effects to kick in.

We initiate coverage on Property Exchange of Australia, or Pexa, with an AUD 15 per share fair value estimate. We award Pexa a wide economic moat rating based on network effects and switching costs in its Australian exchange business. We forecast revenue to grow at a 10-year CAGR of 12% over the next decade, driven by overseas expansion into the United Kingdom market. We estimate EBIT margins to expand to 48% in fiscal 2033 from negative 1% in fiscal 2023, bringing it in line with other wide-moat exchange and financial infrastructure businesses like ASX, Visa, and Intercontinental Exchange. We assign Pexa a Morningstar Uncertainty Rating of Medium, reflecting few competitive or technological threats, relatively low earnings cyclicality, but high uncertainty relating to Pexa’s expansion into the U.K. market. At current prices, we believe Pexa shares are materially undervalued.

We expect Pexa’s strategic focus for the foreseeable future to be on its overseas expansion into the United Kingdom. Pexa’s exchange business is mostly saturated in Australia, leaving overseas expansion as the primary driver of growth. However, Pexa does not enjoy an equally supportive environment in the U.K. as it did in Australia. In Australia, the country's largest banks co-owned it and with a legal mandate from state governments to move to e-conveyancing, this helped drive adoption. Pexa will therefore have to invest heavily into product development, and especially sales and marketing to drive adoption of its platform by sufficient market participants for network effects to kick in.

We notify clients of our intention to cease coverage on Pexa in November 2022 and place its fair value estimate under review. We provide broad coverage of more than 1,500 companies globally and periodically adjust our coverage according to client demand, investor interest, and staffing. The break in coverage of Pexa is likely temporary and we will likely look to reinitiate in the future.