We maintain our $17.25 per share fair value estimate for wide-moat Pexa PXA following its first-quarter update. The exchange reaffirmed its fiscal 2025 guidance but cautioned investors of uncertainties due to the economic outlook in Australia and the United Kingdom. We read the note of caution as a slight softening of prior guidance. However, the shares are currently trading at a 21% discount to our fair value.

At current prices, Pexa shares screen as undervalued, as the market seems to ascribe no value to the UK business. Our fair value ascribes around $1.75 per share in value to the UK business, based on a 25% probability of successful market entry.

The exchange reported a 14% increase in transfer volumes for its Australian exchange business, its largest segment. Although the result is strong and trending above our forecasts, we don’t extrapolate this for the full year. Property sales activity is currently significantly above trend, and we expect this to normalize over time.

However, one potential cross-current to this normalization is an increase in distressed selling. During 2021-22, Australia saw nearly 25% of homebuyers commit to debt/income ratios of more than 6, when the housing market was at its peak and borrowing rates were at their trough. As interest rates normalized since then, these borrowers saw their already large payments double or triple, depending on their circumstances. We see the possibility for these cohorts, whether owner-occupiers or investors, to become forced sellers, therefore keeping sales activity elevated.

Business strategy and outlook

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 don’t expect Pexa’s Australian business to require much ongoing strategic focus. Pexa’s Australian exchange business is used for the settlement and lodgment of around 90% of property transactions in Australia, with the balance consisting nearly exclusively of transactions that are still paper-based in some of Australia’s smaller jurisdictions and functional niches. We don’t see competitive threats to this business, including from interoperability, which would allow competitors to operate on Pexa’s exchange network. We see Pexa’s wide economic moat well-protected by network effects and switching costs. We therefore expect Pexa to gradually increase its market share to close to 100% of transactions.

Pexa’s other business in Australia, which primarily consists of data-related products, is an area of growth, but it pales in comparison to the UK opportunity.

Pexa bulls say

  • Pexa is a natural monopoly in Australia and well-protected by a wide economic moat.
  • Despite heavy investment today, Pexa’s Australian exchange business, like other exchange and financial infrastructure businesses, has the potential for high margins.
  • Successful overseas expansion has the potential to materially increase Pexa’s addressable market and provide additional operating leverage on product development expenditures.

Pexa bears say

  • Interoperability and regulation may force competition for Pexa’s Australian exchange business.
  • Pexa’s UK expansion may be unsuccessful.
  • Pexa’s expansion into adjacent products and services, including through acquisitions, have not yet delivered notable benefits.

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Terms used in this article

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Uncertainty Rating: Morningstar’s Uncertainty Rating is designed to capture the range of potential outcomes for a company. An investor can think of this as the underlying risk of the business. For higher risk businesses with wider ranges of potential outcomes an investor should consider a larger margin of safety or difference between the estimate of what a share is worth and how much an investor pays. This rating is used to assign the margin of safety required before investing, which in turn explicitly drives our stock star rating system. The Uncertainty Rating is aimed at identifying the confidence we should have in assigning a fair value estimate for a stock. Read more about business risk and margin of safety here.

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.