We recently researched PEXA Group (ASX:PXA) in The Dynamic Investor after reviewing the investment case. Whilst slower UK progress has been supported by stronger trends in the domestic Exchange division in recent times, the next 12 months is a key test period on both fronts. In Australia, navigating regulatory pricing reviews to sustain Exchange profitability is key. Conversion of bank conversations to contracts is now required in the UK. However, PXA’s current share price continues to ascribe negligible value for the UK business.

In its relatively short history as an ASX-listed Company, PXA shares have traded with a high degree of volatility. Notwithstanding, we consider whether current levels present an entry opportunity.

About PEXA Group

PEXA Group is the leading operator facilitating electronic lodgement and settlement of property transactions in Australia (the PEXA Exchange). PEXA Exchange is an Electronic Lodgement Network Operator (ELNO) where it is able to facilitate electronic lodgement and settlement of property transactions on a single platform. PEXA has contractual relationships with 160+ financial institutions and 9,800+ practitioner firms in Australia.

The Company reports across three divisions: ‘Exchange’, ‘Digital Solutions’ and ‘International’. The Exchange division is presently the only profit-making division, accounting for ~80% of group revenue and is presently the main earnings driver.

Key Fundamental Drivers

Exchange Division Continues to Carry Group Performance

The Exchange division had a strong result for the six months to 31 December 2024 (1H25). Revenue grew by +9%, driven by increasing transaction volumes, CPI price increases, a shifting transaction mix and improved market share. EBITDA margin expanded by +90 basis points to 56.3%, which drove group EBITDA margin expansion to 35.9%.

The expansion in Exchange’s EBITDA margin was achieved on the back of: i) Productivity improvements offsetting expenses (+7%) relating to continued investment and inflation, ii) Higher transactions and iii) The average price per transaction increasing by +4.9%.

Regulatory Review Unlikely to Materially Impact Earnings

The national eConveyancing regulator ARNECC has engaged IPART (NSW) to conduct a full review of the current eConveyancing pricing regime. The IPART regulatory review of PEXA’s Exchange pricing is expected to commence on 1 July 2025 and will be required to be finalised within 12 months. PXA estimate a new pricing schedule will take effect beginning of FY27. Crucially, IPART uses a number of frameworks to make conclusions around revenue/pricing, including WACC, cost building blocks approach, financeability test and other methods.

While the pricing review creating earnings uncertainty from FY27+ (given potential changes to PXA’s CPI-linked repricing structure), the review is unlikely to materially impact earnings. The review will either conclude PXA’s current pricing regime is reasonable or recommend a minor cut of perhaps ~5%. In the scenario where PXA’s pricing is cut by ~5%, it is worth noting the there is a sufficient cost-out opportunity for PXA to offset either all or the majority of potential revenue headwinds.

UK Expansion Strategy Stalling

Aside from sustaining profitability and strong margins across its domestic Exchange division, PXA’s focus remains on its UK platform rollout. While the UK platform functionality rollout remains on track, progress on signing up UK lenders is tracking behind plan. PXA is now in discussions with all Tier 1 UK lenders (i.e. those holding >72% remortgaging share), two of which having completed internal approvals and are now ready for Bank of England testing.

However, testing slots are limited and internal bank approval processes continue to drag on widespread adoption of PXA products and the platform in the UK. New Bank of England testing slots are now only likely by the September 2025 quarter.

Improving Gearing Position to Support Capital Management Initiatives

Gearing as at 31 December 2024 declined to 1.9x, from 2.4x as at 30 June 2024, as a result of a strong improvement in operating cashflow. The reduced gearing level allowed PXA to undertake a $50m capital return to shareholders via a 6-month share buyback (which commenced in March 2025).

PXA has also improved the structure of its balance sheet with refinance completed in June 2024, which has resulted in the weighted term to maturity increasing to four years from two years at 30 June 2023.

The Company has provided guidance for gearing in FY25 to be ≤2.5x, reflecting the share buyback being funded out of cash and existing debt facilities. However, gearing is expected to decline over FY26/27, as free cashflow in the UK is expected to narrow materially into FY27. In particular, UK S&P capability will be sizable upon 2H25 launch (50-70% coverage, >80% in FY26). This should see segment cash burn narrow materially thereafter given that the bulk of product development well-progressed.

Fundamental View

We take a cautious view on PXA, given that further progress in the UK is needed for a re-rating. While there is significant upside on offer should key milestones in the UK be achieved, the timing remains uncertain. However, the continuing challenges in the UK, together with the Company deciding to not pursue either organic growth and acquisitions, creates uncertainty (and therefore risk). In particular, it raises the question as to whether PXA should: i) Exit the UK altogether, or ii) Retain an interest, but change structure and strategy; and 3) Find ways to monetise its intellectual property in new markets.

Charting View

PEXA tried to rally in early 2024 but it ended up forming a double too (arrows), which is a negative sign. It is now sliding away again and there is a good chance that we see it make new lows under $10. A reversal near $10 could potentially be a safer entry so investors are advised to wait until then.

 

Michael Gable is managing director of Fairmont Equities.

 

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