Freelancer Shapes Up For Growth Surge

This story features FREELANCER LIMITED. For more info SHARE ANALYSIS: FLN

-Platform liquidity above forecasts
-30% compound growth over five years
-Cash flow to increase from FY18

By Eva Brocklehurst

Freelancer ((FLN)) continues to penetrate a large and deep global market for freelance workers. Canaccord Genuity is impressed with the improved platform that has enabled the company, that connects consumer and small business projects with an online workforce, to be one of the fastest growing technology providers listed on ASX.

The broker reiterates a Buy recommendation and has updated its valuation model to a discounted cash flow methodology from an enterprise value/revenue multiple, which increases the price target to $1.46 from $1.38. Freelancer appears expensive on face value but, when breaking down its earnings, the broker estimates the stock trades at a discount to the ASX Industrials, while experiencing a significantly stronger revenue growth profile and higher marginal return on invested capital (ROIC). These are the two drivers of value creation, in the broker's view.

Freelancer reports an 87% gross profit margin and has an implied sustainable earnings margin of 65%, with an incremental ROIC that is likely to drive a 30% compound revenue growth rate over the next five years. Canaccord Genuity takes the view that in early-stage software companies, revenue growth matters more than improvements in margins, with high-growth companies seen offering returns to shareholders five time greater than medium-growth companies over the long term.

Given the volume of projects listed on the company's website, 2015 has begun strongly and platform liquidity is tracking above Canaccord Genuity's previous expectations. The broker expects the company will make further investments in marketing and product and expand into new regions and territories in the near term. All up, growth is considered a proxy for value, although the broker warns that, in this context, value does not mean reported earnings.

Canaccord Genuity estimates that 75% of operating expenses in FY14 were on growth initiatives such as marketing, product engineers and customer acquisitions with the remainder allocated to maintaining support staff, call centre and fixed overheads. The company is expected to break even on a statutory basis in FY18, as it slows its reinvestment rate to 50% of group revenue. The slowing of relative expenditure should allow free cash flow to materially increase from FY18. Management remains reluctant to provide guidance on when exactly it plans to ease off the growth pedal and this is a potential risk to earnings forecasts, the broker acknowledges.

See also Market Domination Key To Freelancer on December 9 2014.
 

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