Pexa (ASX:PXA): Trying to expand into the Old Dart

Pеxa (ASX:PXA) is one of the few stocks with a literal monopoly over its market – econveyancing; but even fewer companies with a monopoly risk losing it with the flick of a pen. There has been talk of this ever since its 2021 IPO, and whilst threats have not been followed through, they remain. At the same time, Pexa is looking to expand into the UK and is having success in the market. Will Pexa maintain a dominant market position if it loses its monopoly, and can it break into the UK market?

Who is Pexa?

Pexa is named after its platform for electronic conveyancing. Conveyancing is the process of transferring properties and their legal title, something that occurs when properties are transferred between different owners or when owners refinance their properties with different lenders.

Pexa began in 2010 after the Council of Australian Governments (COAG) agreed to digitise and automate conveyancing. Conveyancing fees are paid as part of a property’s settlement and substantially vary depending on the nature of the transaction, but are typically between $200 and $2,000. 

Rapid growth in the market, but not always in the share price

Pexa has undergone rapid growth ever since its establishment, especially in the past five years. Back in 2017, only 20% of all refinancing transactions were completed on Pexa. But now, it processes 99% of all refinancing transactions and 80% of property transfers. Pexa debuted on the ASX in early July 2021 having raised $1.2bn at $17.13 per share. Financial administrator Link (ASX: LNK) owned a stake of 42% and CBA held another 24%. Previously, Macquarie, the WA state government, billionaire Paul Little and the other Big Four banks held major stakes, but they all cashed out prior to the IPO. 

Pexa has been an active acquirer since its listing. In August 2022, it bought informed decisions, which provides economic tools and consulting services for decision making. In May 2023, it launched Value Australia which is an AI-powered property valuation tool. And it bought Land Insight, a leading environmental risk data analytics technology. For its UK ambitions, it bought Smoove, Smoovе is essentially the UK equivalent of Pexa, a company that usеs cloud-based solutions to makе thе conveyancing process more efficient

Since reaching an all-time high of $20.81 over the summer of 21-22, Pexa has never reached its all time highs. Remember that when Pexa listed, the property market was running hot thanks to record low interest rates. The heat of the market showed in Pexa’s FY21 results, with $221m in revenue (up 42% from FY20) and $101.8m in pro forma group EBITDA (up 124%). However, it made a statutory net loss after tax of $11.8m.

The company had another good set of results in FY22, but had stagnant revenues and its bottom line shrank – its EBITDA fell 26% and its NPAT swung from $21.9m in the black to $21.8m in the red due to higher investments as well as higher depreciation and taxes. FY24 saw revenues return to growth, finishing 21% higher. Its operating profit was $21.1m, although it made another statutory loss. Ultimately, the company met or exceeded all guidance it provided. For FY25, it provided guidance of 13-19% revenue growth, a> 34% EBITDA margin, but operating cash outflows of $55-58m. In the UK, it indicated a Remo market share of 25-40% and an S&P market share of 25%. More on the UK in a moment.

Last week, Pexa revised its guidance, informing shareholders it expected a higher impairment than expected of $15m, so upped its impairment guidance from $15-20m to $35-40m. The company also said it would derecognise $19m in tax loses and so expected a tax expense of $40-45m, up from $13-18m.

Losing its Australian monopoly?

One of Pexa’s advantages has been its monopoly position – and being present in every state and territory but the Top End (the NT). There has long been talk of opening the market to competition – obviously this would be bad for Pexa. There is only one formal ‘Electronic Lodgement Network Operator’, Sympli, but it is a minnow compared to Pexa. The ACCC is investigating complaints of anti-competitive behaviour – specifically during period the company has been supposed to be making its systems interoperable with competitors. The intended deadline for this to happen is December 2025, but this may not be reached.

Old Dart expansion

Shareholders were also excited about Pexa’s plans to expand into the UK. In August 2021, the company secured an agreement with the Bank of England to test the product and had commercial banks on board. The company asserts there are no competitors providing the same offering in the Old Dart. And to achieve the same revenue and profit, Pexa would only need a third of the market given the UK market is thrice as large.

As mentioned above, it bought Smoove to help it expand, plus Optima Legal – a remortgage processing firm from Leeds. Progress has been slower than expected as the local market’s understanding is limited. The Australian roll-out was easy because it was enforced by the government. There may also be resistance amongst conveyancers who earn deposit interest right now and would lose it. Absent orders to use Pexa, there is little incentive to use it. It may be another couple of years before we see meaningful figures from the UK.

Conclusion

Analysts covering the company don’t appear too fussed about the struggles, placing a target price of $15.68 – a >25% premium. They’re expecting $401m revenue and $132.2m EBITDA – 17% and 15% growth respectively for FY25. Then for FY27, they expect $450.5m revenue and $168.6m EBITDA – up 12% and 28%.

It is at a P/E of 44.1x for FY25 but a more reasonable 27.9x for FY26. Its PEG multiples look more reasonable at 1.06x and 0.67x for the next 2 years.

Obviously, analysts expect Pexa will be able to maintain an effective monopoly position in Australia, that it will gain a foothold in the UK market…or both. If you choose to invest in this company, you’re making a bet on that too.

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