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Longer Term Outperformance For Pexa Group?

Australia | Dec 09 2022

This story features PEXA GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: PXA

Recent research indicates brokers are generally positive on the longer-term outlook for Pexa Group, while also holding some nearer-term concerns.

-Since listing, Pexa Group shares are trading down around -20%
-The average target in the FNArena database is materially higher
-Morgan Stanley anticipates long-term outperformance
-Shorter-term property market concerns weigh
-Growth avenues for the PEXA Exchange platform and PEXA Insights

By Mark Woodruff

Pexa Group ((PXA)) began life on the ASX in July 2021, after being spun-out from Link Administration ((LNK)), and closed out its first day of trading at $17.00, down from the $17.13 IPO price.

After peaking at $20.81 early this year, the share price has drifted down to $13.75, yet the average 12-month target price in the FNArena database is around 29% higher at $17.75.

While some doubts are creeping in, brokers have retained positive ratings in recent months, except for Jarden (outside the database), which is sticking with its Underweight assessment.

The company operates the leading digital property settlements platform in Australia and is pursuing growth options both domestically and internationally.

The PEXA Exchange platform connects financial institutions, practitioner firms, the Reserve Bank of Australia, Land Titles Offices and State Revenue Offices to facilitate a range of essential functions in the conveyancing process.

There’s also a PEXA Insights initiative, which aims to develop products and services that leverage the company’s property data, together with third party data, to generate property, dare I say, insights.

Back in late October, Morgan Stanley was effusive in its praise for Pexa and initiated coverage with an Overweight rating. In a broad analysis of the Technology, Media and Telecom sector, the broker felt Pexa was one of few stocks that possessed attributes sufficient to qualify as a potential long-term outperformer.

The business is profitable, has a sustainable first-mover advantage and is meaningfully free cash flow positive with a 45% earnings (EBITDA) margin, pointed out the analysts.

The company handles 80-90% of property transactions settled, and Morgan Stanley expects this leadership position will result in greater investment in R&D, as a percentage of sales, to maintain its leadership position.

On the flipside, the broker noted upcoming transaction volumes for FY23-25 may be worse than expected, given falling house prices/listings. However, the business is regarded as only a "shallow cyclical", with transaction volumes varying with the activity levels of the broader property cycle. Longer-term, the total number of transactions in Australia is expected to grow broadly in-line with population growth.

The analyst also observed running a digital exchange is a highly regulated industry, with attendant risks of change.

At its late-November AGM, Pexa reported “encouraging” first quarter transaction volumes of 963,000 and raised first half guidance to 1.9m.

This guidance was in excess of Macquarie’ forecasts though the broker remained under research restriction and didn’t provide a target price or rating (previously Outperform). Macquarie anticipated refinance volumes would remain in line with recently elevated levels before normalising in 2024, while transfer volumes would likely continue moderating, before recovering in 2024. 

In a circumstance that benefits Pexa, the analyst noted banks were utilising margin benefits from higher rates to compete for new mortgage customers.

More recently, Jarden observed settlement activity in NSW and Queensland continues to show weakness, while Buy-rated UBS noted from industry data that second quarter volumes appear to be materially lower.

Jarden expects near-term pressure on refinancing activity though expects a recovery by the second half of 2023. A wave of mortgage expiries, along with an ongoing shift to external refinancing is expected to provide near-term support.

The broker’s Underweight rating is driven by its outlook for the property market, with downside risks to FY23 consensus forecasts expected.

NSW and Queensland settlement activity fell by -16% in November compared to the previous corresponding period, while transfers compressed by -25% in NSW and -27% in Queensland.

Refinancing activity also fell in NSW and Queensland by -11% and -10%, respectively. Despite this data, Jarden’s target rose to $12.70 from $12.35 on a higher market multiple.

In research released yesterday, UBS lowered its target to $19 from $20 after updating for the latest industry data on domestic activity and the company’s expansion targets.

For refinancing activity, the broker noted CoreLogic data suggest ongoing buoyancy, while transfers are -23% lower for the quarter so far.

Growth avenues for the PEXA Exchange platform and PEXA Insights

Via PEXA Insights, the company is targeting $50m of revenue by FY25, which would make this segment a larger revenue contributor than Refinancing.

Management continues to work towards a land information total addressable market (TAM) estimated at over $1.1bn by 2027.

UBS prefers to only incorporate revenues of less than $20m into its forecasts until there is execution,  M&A progress, and the required spending on development becomes clearer.

Regarding the PEXA Exchange platform, Morgan Stanley sees expansion opportunities into a few international markets, such as the UK, which has a TAM two-three times that of Australia.

The broker points out significant localisation is required for the platform in each new market it hopes to address. As a result, Pexa Group is not considered scalable in the same way as other global software companies.

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