Pexa: Initiating With AUD 15 per Share Fair Value Estimate and a Wide Moat Rating

We initiate coverage on Property Exchange of Australia, or Pexa PXA, 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 believe the market attributes significant negative value to Pexa’s overseas expansion efforts into the U.K., which we believe is excessive. We therefore believe that successful market penetration or strategic withdrawal could serve as catalysts for the share price to converge toward our fair value estimate.

We estimate the intrinsic value of Pexa’s Australian exchange business, as a stand-alone business, at AUD 14 per share. We view Pexa as a natural monopoly in Australia, providing the basic exchange infrastructure for property transactions. We estimate Pexa’s Australian exchange business has the potential to generate around AUD 100 million in free cash flow from fiscal 2024 (when stripping out growth spending) and continue growing free cash flow by Consumer Price Index thereafter. Given the stability of its bond-like, inflation-linked earnings, we believe Pexa’s earnings profile is best compared with inflation-linked bonds.