PXA -21.29%: was hit today after IPART released its draft recommendation on Electronic Lodgement Network Operator service fees, proposing a meaningful reduction in the revenue PEXA can earn from its core Exchange business.
The draft report proposes reducing PEXA Exchange’s regulated revenue requirement by around 20%, through cuts to certain transfer transaction fees. PEXA estimates the impact at approximately $70m of revenue, which is a material number for a business where the Exchange remains the key earnings engine.
Importantly, this is not yet final. The draft report will now go through public consultation, with a hearing scheduled for 21 July and submissions due by 14 August, before IPART provides its final recommendations to ARNECC. Any fee changes would not take effect before 1 July 2027 and would apply for the four-year period through to FY31. PEXA’s current CPI-linked fee cap remains in place for FY27.
PEXA’s key argument is likely to be around the timing of any reduction rather than the direction of travel. The company has already flagged that phasing the price cuts over four years is critical to managing the business appropriately, rather than absorbing the full impact in one year.
The stock has been under pressure for some time as investors questioned growth outside the core Exchange business, including the pace of its international expansion and the earnings contribution from adjacent products. This draft decision adds another layer of uncertainty because it goes directly to the profitability of the core Australian franchise.
This announcement is clearly negative, although not necessarily the final word. The timing is important, with no changes before FY28, and the final outcome could still be moderated through the consultation process. On our estimations, the 20% proposed reduction in exchange fees will hit PXA earnings per share (EPS) by ~25%, at a time when higher interest rates, weaker borrowing capacity and Budget-related changes to negative gearing and capital gains tax are likely to weigh on property transaction volumes. 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 another 2%.
While PEXA owns a high-quality, infrastructure-like platform with a dominant position in Australian property settlements, this regulatory overhang in addition to falling exchange volumes puts PXA in a tough spot. We highlighted these risks in our last update (here), though we elected (wrongly) to hold our position, on the belief that a lot of these risks had already been priced in – that has proven not to be the case today.
MM remains neutral on PXA ~$8.60
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