PEXA Group (ASX: PXA) $10.80

PEXA has been a frustrating position for us in the Emerging Companies Portfolio, and we see two material near terms risks that we’re now struggling to look past:

1. The potential impact of IPART’s review of electronic conveyancing pricing, with the draft report due by 30^th June 2026.
2. Lower property transactions due to changes in negative gearing and CGT, which will likely reduce transaction volumes.

UBS put out an interesting note on PXA yesterday, concentrating on the potential scenarios that could play out depending on the IPART determination. They downgraded their price target from $15.70 to $12.80 and kept their neutral rating, predicated on the upcoming regulatory risk.

The concern is that IPART may move to a building block pricing model, similar to the approach used for regulated infrastructure assets. Under UBS’s scenarios, Australian Exchange revenue, which makes up 84% of group revenue,  could fall by 23% from FY28 in its base case, and by 33% in its bear case. Even PEXA’s preferred “line in the sand” approach, which uses the prior 2019 review as a starting point, could still imply an 11% revenue decline.

• On their numbers, a 10% reduction in Australian Exchange revenue could reduce EPS by up to 12.5% by FY31. In other words, this is not a small regulatory tweak; depending on the outcome, it could materially change the earnings profile of the business.

There are also near-term headwinds. Higher interest rates, weaker borrowing capacity and Budget-related changes to negative gearing and capital gains tax could weigh on property transaction volumes. As a result, we now expect flat transfer volumes and softer remortgage volumes in FY27, with every 1% reduction in PEXA transfers estimated to reduce FY27 EPS by around 2%.

The UK remains the key upside opportunity. PEXA is trying to bring elements of its Australian model into a far less efficient UK property market, and they’ve made recent progress (signing up NatWest), which is encouraging. However, the UK business is still in the execution phase, while the Australian regulatory risk is now front and centre.

MM owns PEXA, but we are likely to reduce or exit the position. PEXA remains a high-quality platform with dominant market share, attractive infrastructure-like characteristics and a credible offshore opportunity. However, the risk profile has changed. The stock has already fallen, down another 5% yesterday on this downgrade,  and some of the regulatory risk is no doubt priced in, but the outcome has become too dependent on IPART.

• We agree with UBS’s caution. Quality alone is not enough when the regulator is reviewing the economics of the core business. We would rather acknowledge the shift in risk and move on than wait for the regulatory process to determine the outcome for us.