Pexa: Valuation Unchanged on Proposed Smoove Acquisition

We maintain our AUD 15 per share fair value estimate for wide-moat Pexa PXA, following the proposed acquisition of Smoove. After the market digested the announcement, shares fell over 7% the following day. We attribute the fall to a perception of weakness that comes from seemingly being unable to organically enter the market. However, we believe Pexa’s core exchange business in Australia alone is worth AUD 14 per share, or AUD 12.50 per share when including net debt, and don’t believe expansion into the U.K., successful or not, warrants as much of a discount as the market appears to attribute to it. At current prices, we believe Pexa’s shares are materially undervalued.

We agree that Pexa’s acquisition of Smoove does not signal strength. Smoove is an online conveyancing panel manager for sales and purchase agreements, which Pexa hopes will improve its ability to enter the U.K. sale and purchase market. However, Pexa has not yet been able to make meaningful inroads into the remortgage market, which we believe is a necessary first step before moving into the more complex sales and purchase market. More specifically, we believe the natural way to build network effects is to start with transactions that require fewer participants, and once a critical mass of participants has been established, move into transactions that require more participants.

Additionally, we believe that entering two product markets at the same time inherently dilutes resources from both endeavors and lowers the chance of winning in either. We therefore tend to prefer a focused approach and dominating one market before moving on to another. Given that Pexa, like any organization, is resource-constrained when it comes to such expansion efforts, we believe the acquisition has reduced the remaining available resources and has brought forward the deadline that shareholders will have to see signs of success in the U.K. market.