We believe investor success is predicated on finding companies with durable competitive advantages that trade at a discount to their intrinsic value. Perhaps Warren Buffett said it best when he summarised his investment approach as buying great companies at attractive prices. At the moment, our analysts think that four ASX shares meet this criteria.

A Wide Moat rating means that our analysts think the company’s competitive advantage will persist for at least twenty years. Each of these Wide Moat shares are currently trading at a discount to our fair value estimate.

PEXA (ASX: PXA) ★ ★ ★ ★ ★

  • Fair value: $17.25 (34% discount as of 15/4/2024)
  • Moat: Wide
  • Uncertainty: Medium

Pexa operates a virtual monopoly on digital property settlement and lodgment in Australia, at around 99% market share of digital transactions and close to 90% market share of total transactions. The remaining market share consists of paper-based conveyancing in some of Australia’s smaller jurisdictions and functional niches. Given the widespread adoption of Pexa’s platform by stakeholders, our analysts expect this remaining market share to eventually move to Pexa’s digital platform as well.

Pexa’s Wide Moat rating is primarily supported by network effects. In Australia, property transactions require the involvement of numerous stakeholders. The benefits created by all these stakeholders using a common platform creates a pull-effect across the ecosystem. Digital competitors to Pexa will also be faced with high switching costs. This is because switching to a different solution would require the integration of technologies and retraining of people, which incurs direct financial costs, opportunity costs, and business risk involved with the switching process.

Given the high value of real estate transactions, we believe there is a strong disincentive to switch away from Pexa’s proven and reliable platform. Pexa charges below $100 per transaction on average, so there is also little reward for consumers relative to the transaction size and risk.

There are few opportunities for growth in Australia given Pexa’s dominance of the local market. This leaves overseas expansion as the primary driver of growth. Pexa have focused their efforts on the UK, which has similar land titling rules and a lack of a similar settlement system to Pexa’s offering.

We believe the shares are undervalued with investors overly concerned about how much Pexa will spend on its UK expansion. There are also some concerns that Pexa’s dominant position at home could be threatened by the start of interoperability on its platform. Given Pexa’s existing network effects and switching costs, we do not expect competitors to Pexa in Australia to build financially viable businesses. They are unlikely to capture sufficient market share to justify the required investment into product development, sales and marketing.

Our analysts assign Pexa a Fair Value of $17.25. The firm’s drive to expand in the UK are both the biggest source of uncertainty and potential upside. Our analysts expect a binary outcome, where Pexa will either be successful or retreat from the UK market without expending too many resources. While Pexa does not enjoy similar backing from interested parties in the U.K. as it did in Australia, it is starting from a much stronger position in terms of its product.

Fineos Holdings (ASX: FCL) ★ ★ ★ ★

  • Fair value: $3.10 (47% discount as of 15/4/2024)
  • Moat: Wide
  • Uncertainty: Very High

Fineos provides core software to the global life, accident, and health insurance industry. Building on its leadership in claims and absence products, Fineos aims to cross-sell its broader product set including payments, billing, data and more. The firm is currently migrating customers from on-premises products to a cloud-based offering. This makes it easier to roll out new features and support at lower marginal costs, while also providing more recurring subscription revenue.

Our analysts think Fineos has a Wide Moat because of switching costs. Insurers are generally averse to changing core systems as it entails a huge time investment and risks of data loss and business disruption. Even if a competitor were to market a better product to a Fineos customer, it would still have to overcome these impediments to win them over.

Fineos has a long growth runway as most insurers continue to use legacy systems with limited functionality. This is a double-edged sword as it could mean that the industry attracts substantial competition and discounting. Switching costs are likely to cushion the impact on Fineos’ ability to retain clients. However, it may limit their scope for price hikes and require continued investments in its product offering to stay competitive.

Our analysts believe Fineos has a fair value of $3.10 per share. This is based on the company reaching net profitability next year and continuing to gain market share from a small base of around 1.3% of the total addressable market. It is hard to project Fineos’ earnings with precision because the insurance software market is evolving quickly. The impact of Fineos transitioning to a cloud-based offering is also uncertain.

Client concentration, while falling, is also a risk as large Fineos customers could leverage their purchasing power to avoid price hikes. A wider range of potential outcomes is reflected in our Uncertainty Rating of Very High which denotes our opinion that investors should have a large margin of safety. Nevertheless, at the current price we believe the shares are attractive. 

More on the relationship between business risk and the margin of safety can be read here.

ASX Ltd (ASX: ASX) ★ ★ ★ ★

  • Fair value: $75.00 (15% discount as of 15/4/2024)
  • Moat: Wide
  • Uncertainty: Low

ASX is Australia’s leading provider of equity listings, settlement, clearing and trading. It has an effective monopoly on equity listings in Australia with over 95% market share. ASX’s catchment zone also extends to New Zealand, with New Zealand based companies cross listing on the ASX equating to around a third of total companies listed on the New Zealand Stock Exchange.

Our analysts have given ASX a Wide Moat rating due to network effects in its settlement, trading and clearing businesses. A network effect is where a company’s products and services are improved by every additional user. This generally eventually leads to a winner-takes-most competitive environment.

In ASX’s case, higher trading volume leads to better liquidity, lower costs and tighter bid-ask spreads for traders. We also think that ASX benefits from these network effects in its technology and data business, which can offer products and services based on proprietary data generated by ASX markets. As ASX provides much of Australia’s financial infrastructure, the firm’s activities are heavily regulated. Our analysts believe this limits the company’s upside and downside potential.

ASX has long been protected from competition through exclusive licenses to clearing and settlement. However, ASX’s decision to shelve long-promised upgrades to its settlement system have led to concerns that regulators will seek greater competition. Our analysts think the chances of this are reduced by the fact that equity settlements and clearing are hardly hot-button issues for most of the Australian electorate. Our analysts think it is more likely that the Australian financial system continues to consolidate around ASX due to its monopoly-like market share and the network effects mentioned earlier.

Our analysts think ASX has a Fair Value of $75 per share. This is based on revenue growth assumptions of 6% per year for the next decade and higher profit margins as investments in the clearing upgrade wind down. On the revenue side, our analysts think ASX could benefit from increased trading and hedging volumes if market volatility continues because of changing interest rates and geopolitical tensions. This is especially relevant to materials and energy companies, which make up over 50% of the companies listed on ASX. While more volatility could impact the number of new listings, our analysts think the important role of metals and natural gas in the net zero transition could outweigh this and lead to listings growth.

Endeavour (ASX: EDV) ★ ★ ★ ★

  • Fair value: $6.10 (15% discount as of 15/4/2024)
  • Moat: Wide
  • Uncertainty: Low

Endeavour operates Australia’s largest network of brick-and-mortar liquor stores, with more than 1,600 outlets across the well-known Dan Murphy's and BWS brands. Endeavour also has substantial interests in hotels and electronic gaming machines, with over 12,000 gaming machines across its portfolio of more than 300 hotels, pubs, and clubs. The liquor retailing business generates over three quarters of Endeavour’s revenue.

Our analysts think that Endeavour has a Wide Moat in its liquor retailing business. This is largely thanks to scale advantages. Through the Dan Murphy’s and BWS brands, our analysts estimate that Endeavour controls almost half of Australia’s off-premises liquor market. This means that Endeavour’s costs such as marketing, administration and distribution are spread across a far bigger revenue base. In turn, this allows Endeavour’s brands to offer competitive prices while making higher profit margins than its smaller competitors. Endeavour’s size also gives it unparalleled bargaining power with suppliers.

Our analysts give Endeavour a Fair Value of $6.10. This is based on sales in Endeavour’s liquor business growing in line with the broader Australian liquor segment at around 4% per year. Our analysts think that concerns regarding consumer demand are misplaced as Endeavour sells staple products. As a mature business, it’s likely that Endeavour’s earnings would mostly be directed to paying fully franked dividends.

My colleague Shani recently wrote a detailed review of Endeavour titled This stock ticks the boxes.

How to find companies with a moat

Learning to spot different kinds of moat can help you find excellent companies to invest in for the long-term. This is because a moat can protect a company’s profitability and returns on capital over time. This article from my colleague Mark LaMonica teaches you more about different types of moat and how to spot them.