Some thoughts on PEXA, as I at least have some experience with it and I’m not intelligent (or yet confident enough) to attempt a valuation that might withstand even meagre scrutiny.

My experience is from Queensland, potentially and probably differing from other states, and any terms like “monopoly” are in reference to such.

I have recently been admitted to the legal profession and have had a couple of years experience as a law clerk in different firms. Rather often, I will be pondering investment opportunities at my desk (he says, also pondering his own career choice) and have considered some of the companies that appear to be the dominant players in the legal space.

LEAP and Infotrack are both privately owned by some wealthy individual, I believe. For those who don’t know, LEAP is basically the home app for your law firm - storing all the matter info, client details, documents, correspondence - literally anything and everything. Infotrack, from my understanding, is just a data seller (if you can imagine an ASX type company that sells up-to-date info at a premium) - absolutely essential if you need to get an accurate title or business address, for example.

I would absolutely love to get a piece of them, considering LEAP is pretty much a monopoly here already, as far as I can tell, and you need to pay Infotrack all the time for property searches, company searches, etc. Ultimately, if you want to run an effective and competitive firm, then these are essential. But alas, they are off the public picnic table.

Hence, my thoughts lead me to PEXA. Pretty much every firm I have ever encountered uses PEXA for their property settlements. I have heard of other platforms, however, I have never seen them in operation.

“Conveyancing” is basically the legal term for facilitating the purchase and sale of a property. Conveyancing was once a completely in-person experience but has recently moved digital. Unless you’ve done a private paper sale, if you’ve bought or sold property recently, then your agent/lawyer has probably used PEXA.

My area is not conveyancing, but I have seen it in action over the years. As far as I can tell, PEXA pretty much acts as the middle-man platform between the buyer and seller, then clips the ticket for the transactions that it facilitates, meaning you’re probably paying their fee as the seller/purchaser - a bit like those pesky real estate agents @Strawman

Could be wrong here, but that means its success is tied more to the amount of property transactions, as opposed to whether the property market overall does “well”. 

This kind of business feels like the type that could become (for better or worse) extremely entrenched in “the system”. Everything is moving digital. I cannot for the life of me understand it, but the courts are only just now starting to think about rolling out electronic filing for District and Supreme Court matters. 

At this stage, if you want to file documents in anything above the Magistrate’s Court (small matters court), you must physically take the physical paper documents into the court to file. Or, if you live hours away from the Supreme Court, like me, you pay a Process Server to file it for you - a business model which ultimately looks destined to die with further digital inclusion. The court will not accept electronic filing as of yet, but it seems inevitable.

Anyway, back to PEXA, no one does paper settlements anymore in practice. You might do them out of necessity, but it’s just not very practical or efficient, ever, unless you wind up in a firm that is primarily hard-copy, which do still exist, believe it or not. I don’t know the numbers, but I imagine the majority of settlements now are done through PEXA in Australia. 

It seems like PEXA could become a very stable business. Again, don’t know why, but the “higher tier” jobs - doctors, lawyers, etc. seem to be the most resistant and sluggish in adopting new technologies/processes. If a firm has spent considerable resources training and implementing PEXA into their system, then they will probably keep it on so long as it works.

It’s one of the only, and most popular, electronic settlement platforms that is historically proven and government trusted - so why change?

You would change - if the competitor’s product was many magnitudes greater/cheaper - but they aren’t, and I doubt they will be any time soon (could very well be wrong).

However, it seems rather difficult to improve much further here, considering all PEXA has done is take the required physical property settlement and move it digital. If the intermediary is always required to facilitate a property transaction, then the next logical evolution is … maybe metaverse/neural-link residential property settlements…?

What a time to be alive.

This leads me to my main question/concern - the potential growth of the business. 

If this business is already (which I would humbly argue it is) the winner (at least in AUS and UK) then is there much growth left remaining? Does this business seem likely to have an international scale potential? One thing to keep in mind also, this kind of business will likely only have any sort of “interoperability” with markets that share, or are similar to, the Australian legal system. Probably why the UK market and AUS market have been so successful - because Australia’s legal system is basically derived from English law.

I don’t think it would be possible for PEXA to ever expand into countries that have a differing notion of property rights, as the systems simply would not mesh well. Ultimately, this could likely even rule out countries like the U.S. that, although share our general political sentiments, have an entirely different system of law. Perhaps this means PEXA’s total growth is limited to only Commonwealth countries (and probably far fewer than that)? Either way, there is a certain extent to its growth, given the differences in human political ideology.

A final note, I would have thought the increased adoption and almost monopoly of this business would’ve equated to an increase in share price. Not yet. Listing back in 2021, down roughly 20%. Is this because of the lofty valuation in beginning, lack of attention at present, future growth already priced in, something else…?

For a quick summary:

• For anyone to buy/sell property they have to adhere to legal considerations (regarding the actual transfer process) and PEXA basically handles this.

• PEXA seems to profit from property transactions - irrespective of whether the property market does poorly or well (the main point I am very uncertain about).

• From my own personal and professional experience, PEXA seems to be the dominant (and arguably essential) provider of electronic settlement services.

• Does this dominance come from any sustained competitive advantage or is it simply the sluggishness of government and the legal system. Further, if the sluggishness of the legal system is something we can count on - is this not good for PEXA?

• Can PEXA continue to grow into other jurisdictions and, if not-
• -does this make the company unappealing or simply less attractive for its future prospects?

• (rambling final) Is this just some strange combination of a less than mediocre business with network effects (by virtue of everyone using the service) and switching costs (by virtue of the industry that they are in) - making it like a bastardised double positive, wherein it actually becomes a negative, because both of these moats are simply a result of uninspired coopetition and regulatory advantage? In other words, what PEXA has is great, however, anyone could do it and the only reason they are winning is because they moved first and in correct manner (but may not necessarily have any sustainable edge).

I suppose I just wanted to see if anyone else has had any personal experience with PEXA as few seem to cover it despite its widespread usage in practice.

Ultimately, if I bought some shares in this thing and held it until I had grandkids, I would think it somewhat likely that the business survives in some form, considering the stickiness of the industry … but is there enough growth left or will it simply become a potential dividend payout depending on the amount of property transactions that happen year to year?

Would very much appreciate a discussion on PEXA as my understanding of it as a business/financial metrics is relatively limited.

Cheers.

Forgive me if this has been covered here previously.

For some time there has been a push to encourage those operating in the electronic conveyancing lodgement arena to get together and make sure their systems can interact in what I understand might be similar to how the banks work together, when their customers transfer funds. This is referred to as "interoperability".

The Australian Registrars’ National Electronic Conveyancing Council (ARNECC) has been charged with this task. They have conducted test runs and were due to roll out in QLD & NSW. My reading of this is that the implementation of this interoperability was designed to encourage competition in the market. Giving other Electronic lodgement network operators (ELNOs), companies like Sympli and Lextech Pty Ltd, a greater opportunity to participate alongside Pexa.

Then on 26 June 2024 in an ann. to the ASX Pexa advise:

"ARNECC advised industry that the interoperability program has been paused, and they are in the

process of standing down their project team."

This reads to me as: The powers that be, are throwing out the interoperability plans and Pexa's near monopoly status remains intact. Competition will not be fostered, at least using this mechanism.

For those who have been following PXA is that a fair assessment of the situation?

Pexa is an interesting company, I started my initial research and documented the current situation: https://www.growthgauge.com.au/p/pexas-asx-pxa-strategic-position

Will do follow up after FY24 result.

The Australian - PEXA back on radar for private equity including Thoma Bravo | The Australian

Property Exchange Australia is once again back in focus for technology investors, with US private equity firm Thoma Bravo said to have been assessing the business for a potential takeover play.

It is understood PEXA has been on Thoma Bravo’s radar as executives look at a range of opportunities in Australia. It has also been eyeing other targets such as Iress.

Pexa’s share price has come off the boil of late, down to $11.42, with its market value at $2.1bn after the stock traded over $13 a month ago. When Pexa listed in 2021, its share price was around $17.

Thoma Bravo is understood to count Jarden as its adviser as it assesses a number of tech companies listed on the local market.

The digital real estate settlements business PEXA has caught the attention of suitors off and on over the years, with the company receiving calls from investment bankers on behalf of clients interested in an acquisition of the business.

A year ago when buyers were around the hoop, it was considered expensive at over $13. When a sale process was run for a stake in PEXA during 2021, there were 17 parties that signed nondisclosure agreements to enter a data room to buy the assets.

Kohlberg Kravis Roberts offered more than $3bn for the business, including debt, but it was instead listed with a $3.3bn value.

PEXA was also earmarked for a float in 2018 before it was purchased by Link Administration and its backers, its value was $1.8bn or $2.2bn including debt.

PEXA could be considered a monopoly asset, largely dominating the online property conveyancing market, and private equity firms and infrastructure investors are always on the lookout for such opportunities.

Along with Thoma Bravo, groups such as KKR and EQT Infrastructure are the typical candidates to move on such companies.

I stumbled across Pexa in one of those many fund manager recommendations on Livewire and decided to do some research. To my great surprise the company wasn’t covered at all on Strawman, although since I started this research note I see that @momo3173 has beaten me to it. 

(I am indebted to the AFR for much of this research.)

What does Pexa do?

PEXA (Property Exchange Australia Ltd.) is an Electronic Lodgment Network Operator (ELNO). ELNOs provide the means for transacting parties or their representatives to do away with the manual, labour- and paper- intensive property conveyancing process. The national electronic conveyancing system in Australia  is a world first and allows legal practitioners, conveyancers and financial institutions to electronically prepare and lodge land property dealings with title registries. Practitioners and financial institutions can also transmit settlement funds and pay associated duties and tax, removing the need to physically attend property settlements.

ELNOs are approved by the registrar in each state and territory to operate in that jurisdiction.

The e-conveyancing market has annual revenue of $270 million in Australia, and PEXA has an 80% share of this market. It is in a near monopoly position (but that is about to change).

Transaction revenues are expected to increase in mid-single digits each year.

The core product is PEXA Exchange.

“The majority of land transactions in Australia now occur on the PEXA Exchange”.

“COVID-19 has brought renewed focus and urgency to the digitisation of property settlements”.

PEXA Exchange is integrated with the State Revenue Office and Land Registry in each state, and also with the RBA. It is used by 9400+ practitioners and 160+ financial institutions. Doubtless in recognition that the Australian market growth is going to be anaemic going forward, and that competition may start to steal market share, PEXA is developing a new product to support property settlement in international markets, starting with the UK. This will require integration with the Land Registry and the Bank of England, as well as onboarding UK financial institutions, so it will probably be 2023 before PEXA is able to tick all the boxes with these government agencies and start earning revenue. The UK market is three times as big as Australia, so to build a business the same size as the Australian exchange PEXA would only need to capture a third of the market share. By its own admission, PEXA doesn’t expect to start building significant transaction volumes in the UK until 2024.

PEXA has 350+ employees across Australia and the UK.

History and ownership

PEXA was established in 2010 after a COAG meeting of state governments and territories pledged to move from paper-based property settlements to an electronic system. PEXA entered development in 2011 (assisted by Accenture) and processed its first full property settlement in partnership with the Commonwealth Bank in 2014. Electronic settlement became so successful that by 2018 all states made the use of PEXA Exchange compulsory for conveyancers and lawyers.

PEXA joined the ASX on 1st July 2021 after an IPO which raised $1.174 billion at a price of $17.13 per share. Prior to this the ownership was split between Morgan Stanley Infrastructure, Link and CBA.

In the IPO, CBA increased its stake to 24% ownership, Link reduced its ownership from 44% to 42.8%, and Morgan Stanley sold out altogether.

Where does the revenue come from?

The primary revenue source is from land and property sales (81%), followed by property refinancing (13%). PEXA earns an average of $66 per transaction, and incurs a cost of $9 per transaction (mostly for fees paid to state land registries), resulting in a gross margin of 87%. Although PEXA offers a variety of other tools and apps to enable participants in property transactions to track progress, these seem to be part of the overall value proposition and do not attract additional revenues.

What about the management?

The PEXA CEO is former National Australia Bank executive Glenn King. He joined PEXA 2 years ago, after 7 years as a senior public servant in the NSW government. The COO Simon Smith joined a year later - he worked for 24 years in the NSW government so doubtless was well known to Glenn King. Richard Moore joined as CFO a few months after Simon Smith, and was previously CFO at MYOB. The new chairperson Mark Joiner joined in May this year, and also has a background working for NAB. James Ruddock the Chief Product & Digital Experience Officer is an old hand having been with PEXA for 9 years. John Natsioulas the GM of Technology is also an old hand of nearly 8 years, and has a background in performance testing rather than software development. There used to be a CTO but that position seems to have been retired.

Competition and interoperability

Sympli, jointly owned by stock exchange operator ASX Ltd and Infotrack, is the most advanced rival to PEXA. However, although it has been approved as an ELNO it is still in a pilot phase.

PEXA has had a multi-year headstart on competition and currently offers the best functionality and customer experience. This is evident from its Net promoter score of +55 and brand trust score of 8.7 – both industry-leading. Additionally, the company is able to process more transfers than any other competitor.

However the days of this monopolistic position appear to be numbered, with pressure from industry bodies and the ACCC to allow multiple ELNOs to interoperate, so that a buyer’s conveyancer might use PEXA for example whilst the seller’s conveyancer might use Sympli. This is not possible today.

PEXA now appear to be vocal supporters of interoperability, on the basis that what is good for the industry is good for them. However 3 years ago in a different political environment the company was still fighting hard to preserve its monopoly:

" We doubt it will be feasible or efficient for consumers to complete transactions across more than one ELNO, and there would be many practical and legal obstacles that would be extremely difficult to overcome.  The legal framework governing ELNOs, the liability models in place, and the critical security requirements for the $7 trillion residential property assets nationally, are not compatible with this approach."

The target for implementation of the interoperability model is the end of 2021, but it seems like most observers expect it to be the end of 2022 before other ELNOs can operate on a level playing field with PEXA.

Rather astutely, PEXA has used it's experience as the dominant ELNO to propose how the interoperability model should work, and this proposal has been signed off by state and federal governments. In this model PEXA retains a key role as a hub which controls the exchange of data with state records offices, financial institutions and the RBA.

Financials

2021 results:

Revenue $221m (+42%)

EBITDA $102m (+124%)

NPAT -$12m (+600%)

Adjusted loss $5m

3.3m property transactions (+37%)

After taking into account research & development expenses, free cash flow (FCF) is $85m.

The large difference between EBITDA and NPAT seems to be due mostly due to repayment of some shareholder loans ($36m) and amortisation of ‘acquired intangibles’ ($57m).

General and Administration is the largest cost item at $53m (+43%), followed by product development at $24.5m (+13%) and sales and marketing at $20m (-10%). 

Revenue forecast for FY22 is $247m (+12%) - this seems to be very conservative given revenue growth of 42% in FY21. EBITDA forecast is $108m (+6%) and NPAT forecast is  -$2.5m.

Growth Drivers

There are three growth drivers called out by the company:

• Expansion into other markets (with the UK - England and Wales - being the first cab off the rank);
• Providing data insights - developing products and services to generate data insights for real estate agents, conveyancers, vendors and home buyers;
• Incubating new ‘digital property products and services’.

The latter two sound rather fanciful - expansion of the core property exchange platform into new markets is the most likely source of growth in the medium term (2-3 years).

Risks

• Perhaps the biggest risk is that once interoperability becomes a reality,  Sympli will steal market share by undercutting PEXA. Sympli claims their pricing is ‘15% to 50%’ lower than other ELNOs - and PEXA is the only other ELNO. However, the fees charged to use an e-conveyancing platform are paid by real estate buyers and sellers rather than the firms which choose and use the platform on their behalf. This means price-based competition is unlikely to impact the choice of platform. Australia’s largest mortgage provider, the Commonwealth Bank, is PEXA’s second largest investor with a 24 per cent stake and is unlikely to defect from its platform.
• Expansion into the UK could fail to deliver profits. It requires substantial uptake of e-conveyancing in the UK, where it is not mandated by the government, and previous attempts to introduce a digital property exchange in the UK have failed, twice. When the Land Registry piloted an e-conveyancing platform in 2006, for example, it eventually dropped the scheme after failing to get enough take-up. The Law Society had a go in 2015, but its scheme foundered too.
• PEXA appears to be a technology company, but is it really? The Exchange platform was developed with the help of Accenture, and the international platform is being built with the help of ThoughtWorks in the UK . It sounds like there isn't a strong development capability in-house. 
• There seems to have been a clear out of senior management leading up to the IPO, and I find the fact that the CEO, COO and chair all have form with NAB a bit disconcerting. NAB are well known for their disastrous foray into the UK.

Comparables

ASX would seem to be the most similar company to PEXA on the ASX.

PXA Enterprise value $3.15b, revenue $221m, EV/revenue 14.25

ASX Enterprise value $10b, revenue $962m, EV/revenue 10.4

Conclusion

PEXA needs to be a technology innovator to experience significant growth, and it just doesn’t feel like it is one to me. I expect the share price to go nowhere for 2-3 years, and there are no dividends in sight either, so I won’t be adding it to my RL or SM portfolio.