In its relatively short history as an ASX-listed Company, PEXA Group (ASX:PXA) shares have traded with a high degree of volatility. The downtrend in the shares over the last couple of years is mainly due to expansion; both into the UK market overseas and away from its core exchange operations. While these businesses have been loss-making, there is scope for increased profitability.

With this in mind, we recently researched PXA in The Dynamic Investor to assess the prospects for a more sustained recovery in the shares.

About PEXA Group

PEXA Group is the leading operator facilitating electronic lodgement and settlement of property transactions in Australia (the PEXA Exchange). PEXA Exchange facilitates electronic lodgement and settlement of property transactions connecting property stakeholders on a single platform.

The Company reports across three divisions: ‘Exchange’, ‘Digital Solutions’ and ‘International’. The Exchange division is presently the only profit-making division, accounting for ~85% of group revenue and is presently the main earnings driver.

Key Fundamental Drivers

Margin Expansion Expected for PEXA Exchange Division

The PEXA Exchange division generates revenue based on the volume and lodgement type of transactions with fees payable on completion of settlement.

FY24 revenue growth of +11% for the Exchange division was driven mostly by CPI-linked repricing; whereby the average price per transaction increased by +9%. This resulted in a 54.5% EBITDA margin for the Exchange division, which was at the top end of guidance for 50-55%. EBITDA margin in FY25 is expected to remain at the top end of this guidance, given that:

i. The PEXA Exchange has strong operating leverage due to a relatively high proportion of fixed costs with profitability strongly correlated to transfer volumes.
ii. Pricing growth of ~9% is expected to be maintained due to the continued mix shift towards a higher proportion of transfer transactions.

UK Operations The Next Growth Leg – But Remains Loss Making

The maturation of the domestic market led the Company to expand into the UK. The UK is a sizable opportunity for PXA from the viewpoint that the UK has residential stock 3x the size of Australia’s. In addition, conveyancing processes in the UK are underserved in terms of a software/digital solution point of view.

PXA’s first major acquisition in the UK was Optima Legal (‘Optima’) in September 2022. This was followed by the acquisition of Smoove in December 2023

PEXA’s UK platform is well established and now covers ~70% of remortgage types in the market.

The Company is focussed on working towards its ambition of achieving remortgaging market share of 25-40% and Sales & Purchase market share of 25%. The timing of the ramp-up in market share is critical to the International division becoming profitable.

The division reported an EBITDA loss in FY24 and is not expected to become profitable until at least FY28. A major step forward was the announcement in May this year that it progressed its strategic partnership with UK lender NatWest. Under the partnership, Natwest will utilise PEXA’s digital property exchange technology to deliver 48-hour remortgage transactions to its customers. Further deals are expected, with the Company fielding requests from two large UK banks and four small banks to test the PEXA platform through the Bank of England. Successful conversion should support growth in PXA remortgaging transactions through the mid-term.

While the above market share targets remain, the Company has not set guidance for the timing of progress in the UK, nor was there a ‘go-live’ date provided for the NatWest partnership. The Company attribute this to external factors beyond PEXA’s control when dealing with large financial institutions. As such, the estimated expansion in market share has been tempered, from ~11% for remortgages (from ~15%) and to ~2% for Sales & Purchase (from ~3%).

Funding Requirements For Smaller Divisions Putting Balance Sheet Under Pressure

The balance sheet has an elevated gearing level. However, this is mitigated by a strong net interest cover ratio of 18.8x and no refinancing requirements until June 2025.

PXA is exploring some capital-light approaches in order to reduce the current free cashflow from the Digital and International divisions. In particular, the International division absorbs a significant portion of group CAPEX and is presently being funded out of strong free cashflow generation from the Exchange division.

Fundamental View

A PXA shares are currently trading on a 1-year forward P/E multiple of ~48x. However, one cannot ascribe significant weight to this measure given that EPS forecasts are heavily impacted by several factors These include elevated non-operating costs, higher amortisation charges and an increased tax rate. The latter is due to a greater domestic earnings skew and higher non-deductible items. In turn, this gives rise to a wide range of consensus EPS forecasts.

In addition, the Company has a limited trading history (PXA listed on the ASX in July 2021). Over the last ~3 years, the earnings base on which the Company is valued has transformed from defensive-like to volatile. The latter is due to the addition/expansion of the loss-making International and Digital divisions.

A key catalyst for the shares is further progress regarding major UK banks transacting on the PEXA platform. However, given the timing delays experienced by PXA in dealing with large financial institutions, coupled with the risks regarding timing of regulatory approval, this catalyst is not expected to occur in the near term.

As such, we remain on the sidelines for now.

Charting View

After peaking several weeks ago, PXA then eased back to form what looks like a bull-flag. This means that, if the stock decide to break out, we could see some higher levels in the short-term. A daily close above $14.50 would classify as an upside break and that could see PXA rally towards the high $15’s. Otherwise, a failure to break higher could see it continue its drift lower back towards support near $13.

 

Michael Gable is managing director of Fairmont Equities.

 

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