ASX investors are continually seeking S&P/ASX 200 Index (ASX: XJO) stocks with significant upside potential.
With the ASX 200 Index trading not too far from its all-time high, this task has become increasingly challenging.
In a 2 October research note, Unlocking the UK's potential: Reiterate Outperform with blue sky valuation >$30, Macquarie Group Ltd (ASX: MQG) makes the case for why Pexa Group Ltd (ASX: PXA) could deliver up to a 140% return over the next 12 months.
In that report, the broker outlined its base, bull, and bear case valuations for the ASX 200 real estate stock.
Let's see what's behind Macquarie's analysis.
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Pexa's big opportunity
Pexa is Australia's leading online property exchange network. In Australia, it essentially has a monopoly, with over 90% market share.
Pexa has also expanded into the UK market, which provides an avenue for significant revenue growth.
Macquarie estimates Pexa's total addressable market (TAM) to be worth around $500 million, which is around 1.85 times the size of its Australian TAM.
Back in July, Pexa shares rocketed 18% after the company announced that Natwest Group PLC (LON: NWG), the UK's third-largest lender, had formally agreed to use Pexa's platform to facilitate remortgages and sale and purchase transactions.
At the time, management described the news as a significant step in its journey to execute its strategic goals in the UK.
Macquarie's scenario analysis
On Friday, Pexa shares closed at $15.76.
Macquarie recently developed a range of share price outcomes for Pexa shares, which are largely dependent on its success in the UK market.
The broker said:
With PXA recently receiving NatWest's formal commitment, PXA is one step closer to proving out the UK's viability and potential value. However, with the economic framework of the UK still unclear, we set out a number of valuation scenarios to assess what the UK, and in turn PXA, is worth.
Macquarie's base case assigns a price target of $19.10 on Pexa shares.
Its bull case is much more optimistic. The broker believes the ASX 200 stock can hit $37.50, assuming Pexa succeeds in the UK, including market share and margins comparable to Australia. It also assumes Pexa can expand its margins in Australia.
Finally, Macquarie's bear case price target for Pexa shares is $12.15. This assumes "no success in the UK, AU price cuts and the impairment of Digital, although only just ~21% below the current share price."
Foolish Takeaway
ASX 200 stock Pexa has an opportunity to deliver significant growth if it can succeed in the UK. Last week, Macquarie set out a range of scare price scenarios that could occur, depending on its level of success. Should Macquarie execute, its shares could rally up to 140% over the next 12 months, according to Macquarie's best case scenario.
