Why I think Freelancer (ASX:FLN) could return 50-60% over the next few years.

Chris Titley
Chris Titley Morgans Financial Limited

Freelancer started it's listed life with a bang up nearly 5x on listing from it's 50c IPO price . Since then , the share price has fallen gradually to below $1 and now up to $1.15 in recent weeks. In my view, this presents exceptional value for the higher risk investor.

Freelancer.com is starting to move forward from sub one dollar recently, and for me this is just the beginning.

Here are the reasons why:

* Freelancer is 6 years old now and has over 15.6m users and has 7.7m projects posted through the platform. Last night for instance, they had c10,000 new users join the network. Yes, 10,000. * It's barely had a cent of debt (300k repaid early in 2009) and has net cash of over $20m * It's revenues have tracked below which is a c59% 5 year CAGR:

2009 - $1.9m 2010 - $4.7m 2011 - $6.3m 2012 - $9.6m 2013 - $18.7m 2014 - $26.1m 2015 - my assumption is late 30s

* The company’s growth has been fully funded and is expected to be fully funded for the next couple of years by existing revenues... as I said no debt. Net cash of over 20m.

* Their major competitor O-desk/Elance completely re-branded last month and has invested significant capex after a $30m raise recently - my gut feeling is their ROI will suffer on the back of this re-brand as they are culminating two brands in to one on a completely new platform. Now the big question? Earnings and valuation

Recently they acquired a business called escrow.com that has US$265m TTV per annum... Freelancer has $100m - so now you have a business turning over $350m ...

It's an incredibly high margin business (c85%) with growth opex running about 70% of revenues and sustainable opex about 30%....

So let's say we continue growth for the next 2 years at historical levels of 30-40% as more of the world gets connected to the internet (via campaigns like internet.org backed by facebook, more mobile devices, better networks) and freelancing/outsourcing organically globally grows...as well as some upside from escrow.com - this not an unreasonable assumption for a business that had $1.9m revenues in 2009 to over $30m 6 years later.

2016 revenues would track around $50m 2017 revenues would track around $65-70m

In two to three years, my view is the stock will grow faster than their cost base can manage - and growth opex may slow.. if growth opex slowed to 20% of revenues - you are looking at 50% margin on revenues of $65-70m or sustainable EBITDA of around $35m... Using an EV/EBITDA of 15x in FY16 which is comparable to Real Estate.com (ASX Code:REA - forecast) that’s a market cap of $525m which justifies the current share price. So right now, in my view you are buying the business for its earnings capability two years out. (and this if they were to stop growing - which I don't think they will)

Furthermore, if growth opex slows faster than that as the business becomes a size where scale falls through to bottom line i.e. growing faster than they can grow their expenses (which I suspect is three-to four years out) particularly with the added resources deployed to escrow.com , you are looking at the possibility or potential earnings of around $50-60m EBITDA in 2018/2019. This puts the market cap to $825m or $1.85 or a c60% return using 15x EV/EBITDA against the current share price - again subject to further ramp up of growth and excluding any acquisitions. So rationally, you are buying a business for two years growth now and if you look out to a 3-4 year view there is potentially 60% upside.

If you want to use tech land acquisition multiples on EV/EBITDA or even revenue multiples - it's a silly number like $2-3 a share... so lets just stick with an REA EV/EBITDA comparison...

* Also, there is only roughly 12.5% freefloat but they are diluting slowly - they raised 10m through UBS at $1.00 recently and as more dilution of key founders take place - there is more chance of institutional interest.

They've just finished on a US roadshow which has seen the price tick up a little , and watch this space for further acquisitions.

It's not without its risk - particularly management succession planning and the threat of competitors and increased security breaches. However, one of the founding directors - Simon Clausen topped up $287k worth at $1.00 recently.

Food for thought.

These views are my own - and not of Morgans. My super fund owns shares in Freelancer and I have recently been purchasing on market at current levels on behalf of myself and clients.

Chris Titley

Morgans Financial Brisbane - (07) 3344 4860 chris.titley@morgans.com.au

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