The Independent Pricing and Regulatory Tribunal of New South Wales, or Ipart, has released its draft report, which proposes that Pexa (PXA.ASX) significantly lower its pricing. Shares fell more than 20% following the announcement.

Why it matters: Ipart proposes that the asset base on which the exchange may earn a return is under $400 million, while Pexa estimates it is closer to $1.4 billion.

  • As a result, Ipart proposes that Pexa lower its fee revenue by around 20% in fiscal 2028 by lowering fees for property transfers. This is estimated to result in around $70 million less in revenue in fiscal 2028. Prices will then be allowed to rise by CPI until 2031, when pricing will be reviewed again.
  • As a second-order consequence, we believe Pexa will now have to abandon its expansion efforts into the UK, as the company no longer has the required financial firepower to force its entry into the market.

The bottom line: We lower our fair value estimate for wide-moat Pexa by 43% to $10.50 per share. Following a more than 40% decline in the exchange’s share price since the announcement of the pricing review, shares screen as undervalued.

  • Our valuation assumes that Pexa will receive concessions in the final decision. However, we think the core methodology for calculating the asset base, which we believe is overly restrictive, should remain in place.

Big picture: We think Pexa should now be viewed as a utility without noteworthy growth prospects, as digital penetration in Australia is already approaching 100% and chances of successful establishment in the UK are now practically nil.

Coming up: The final report will be issued by Sept. 30, 2026, following a period of public consultation.

Pexa Becomes a Utility Following Regulatory Intervention

We expect Pexa’s strategic focus in the near term will be on convincing the regulator to allow it to earn a return on a larger capital base than is currently proposed by the Independent Pricing and Regulatory Tribunal of New South Wales, or Ipart. Ipart has suggested Pexa may only earn a return on a capital base of less than $400 million, which we believe is half of what is a reasonable assessment of Pexa’s asset base. Specifically, we believe Ipart unduly discards setup costs related to the technological infrastructure and onboarding of market participants.

As a result of the regulatory intervention, we think Pexa will also be forced to abandon its overseas expansion into the United Kingdom in the near term. We think the company does not have sufficient financial resources and cash flow from the Australian exchange business to continue absorbing the required setup costs there.

We don’t expect the operation of Pexa’s Australian exchange business to require much ongoing strategic focus. Pexa’s Australian exchange business is used for the settlement and lodgment of around 90% of property transactions in Australia, with the balance consisting nearly exclusively of transactions that are still paper-based in some of Australia’s smaller jurisdictions and functional niches. We don’t see competitive threats to this business. We see Pexa’s wide economic moat as well protected by network effects and switching costs. We therefore expect Pexa to gradually increase its market share to close to 100% of transactions.

Bulls Say

  • Pexa is a natural monopoly in Australia and well protected by a wide economic moat.
  • Despite heavy investment today, Pexa’s Australian exchange business, like other exchange and financial infrastructure businesses, has the potential for high margins.
  • Following regulatory intervention on pricing, we see no latent risk of new entrants coming in, given they are now unlikely to be able to undercut Pexa’s fees.

Bears Say

  • Regulation changes may result in lower prices or limit price increases for Pexa’s Australian exchange business.
  • Pexa’s UK expansion will likely be unsuccessful.
  • Pexa’s expansion into adjacent products and services, including through acquisitions, has not delivered notable benefits and has been discontinued. The company lacks noteworthy growth prospects.

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