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.