Property Exchange Australia (PEXA) is a property technology business, operating a fully digitised property settlement platform. We recently initiated coverage on Property Exchange of Australia, or Pexa, with a $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 annualised rate of 12% over the next decade, driven by overseas expansion into the United Kingdom market. EBIT margins are estimated to expand to 48% in FY33 from negative 1% in FY23, bringing it in line with other wide-moat exchange and financial infrastructure businesses like ASX, Visa, and Intercontinental Exchange. We’ve assigned Pexa a risk 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.
The market appears to attribute 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 rally toward our fair value estimate. Our intrinsic value of Pexa’s Australian exchange business, as a stand-alone business, is $14 per share. Pexa operates a natural monopoly in Australia, providing the basic exchange infrastructure for property transactions. The company’s Australian exchange business has the potential to generate around $100 million in free cash flow from FY24 (when stripping out-growth spending) and continue growing free cash flow at the rate of inflation. Given the stability of its bond-like, inflation-linked earnings, we believe Pexa’s earnings profile is best compared with inflation-linked bonds.