Why Pexa shares are sinking 16% today

PEXA Group Ltd (ASX: PXA) shares are being hit hard on Wednesday.

Investors appear to be heading for the exits after the market reacted to a major broker downgrade and a regulatory update released yesterday.

In afternoon trade, the PEXA share price is down 15.75% to $12.815, making it one of the worst performers on the ASX today.

The heavy sell-off comes despite the stock still being up more than 15% over the past 12 months. That is comfortably ahead of the broader ASX during a period that has included volatility throughout March.

The move suggests investors are weighing what the regulatory changes could mean for PEXA’s core Australian earnings.

Broker downgrade puts pressure on valuation

The sell-off follows a UBS downgrade, with the broker cutting PEXA from buy to neutral and lowering its price target to $15.70 from $17.50.

The concern comes from what UBS called a “double-edged” outcome from two regulatory updates affecting Australia’s electronic lodgement network operator market.

On one side, ARNECC’s decision not to proceed with interoperability reforms removes the near-term risk of expensive platform changes.

PEXA confirmed it would continue working with regulators to improve the existing national network and customer outcomes.

But the bigger issue for investors is IPART in New South Wales proposing to regulate service fees using a building-block framework based on efficient costs.

That creates uncertainty around earnings from PEXA’s dominant Australian exchange business, which remains its main profit driver.

UBS believes that while the interoperability outcome removes one risk, the prospect of fee regulation could place more pressure on margins over time.

Still ahead over 12 months despite today’s pullback

Even after today’s fall, the stock remains up about 15% over the past year. It has also outperformed both its sector and the S&P/ASX 200 Index (ASX: XJO) over that period.

Today’s decline follows a solid run through late March, supported by better progress in the UK business, asset sale activity, and a well-received half-year result.

PEXA still has a leading position in Australia’s digital property settlement market, with its platform widely used by lawyers, conveyancers, and financial institutions.

Foolish Takeaway

Today’s sell-off looks less about how the business is performing and more about concerns over future regulation.

The halt to interoperability changes may remove one issue, but the prospect of fee controls on the core Australian network looks to be the bigger concern for investors.

With the stock still ahead over one year, the focus now turns to whether PEXA can protect margins as regulators work through the next stage.

The post Why Pexa shares are sinking 16% today appeared first on The Motley Fool Australia.

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Motley Fool contributor Aaron Teboneras has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended PEXA Group. The Motley Fool Australia has positions in and has recommended PEXA Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.