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Freelancer Receives Buy Recommendation, A$1.60 Price Target Increased

Freelancer (ASX:FLN) has received a Buy recommendation with an increased price target of $1.60, up from the previous $1.35, following its launch of its local jobs and the purchase of Escrow.com.

The company, which Foster Stockbroking described as leading the online freelancing market, last traded at $1.00.

The following is an extract from the report.

Investment Highlights

Local Jobs. Last month FLN announced the launch of local jobs - its entry into the burgeoning online local services market. In addition to hiring workers from anywhere in the world to undertake work on-line, hirers can choose a freelancer to undertake a local job on-premises.

Local services a US$400b-$745b market. MBO Partners estimated that of the US$1.2 trillion jobs undertaken by US independent workers, 64% or US$745b was conducted within the local metro area.

Angie's List estimates globally it is worth US$400b. These figures are up to 10x larger than FLN's estimates of the global online freelancing market.

A number of players exist in the online local services market, TaskRabbit being the most prominent. Amazon itself recently launched Amazon Home Services, which offers over 700 services, testimony to the lucrativeness of the market.

While the market is large, scalability is an issue due to constraints posed by geographic constraint of services offered being local. In essence each new metro area or city is a vertical. TaskRabbit, despite being founded in 2008, is present in only 20 cities in the USA.

FLN and Amazon have existing users that they can market local services to, making it attractive and synergistic. This significantly lowers their cost of customer acquisition vs competitors. TaskRabbit and other local service providers do not enjoy these advantages. FLN has 15M users.

Escrow.com. In April FLN also announced the purchase of Escrow.com, a leading provider of secure on-line payments, for US$7.5M funded from a A$10M placement. Escrow.com acts as a secure third party that collects, holds and releases fund according to buyer and seller instructions.

This is critical where valuables such as autos, jewellery, antiques, and domain names traded online.

Escrow.com is used by major marketplaces such as eBay (since 2002) and cars.com, and freighters such as FedEx. FY14 revenues were US$5M and EBITDA US$1.2M. We expect that FLN management will be able to grow revenues more aggressively than what Escrow.com has achieved in the past few years.

Scalability challenges favour established networks such as FLN

The increasing popularity of accessing local services via one-stop online portal has resulted in a number of entrants into the market.

However the signing up of enough service providers to enable scale, liquidity, and make the service attractive to hirers can be a lengthy process.

This is because scalability is limited by the geographic constraint imposed by the service offered being local. Each new local area or city is a vertical that needs to be built.

Companies are rolling out in (typically) their home cities first, then repeating in other cities.

While Local Jobs is a new product, FLN has the advantage of a large existing user database that it can instantly promote its offering to. It is the same rationale that Amazon is using.

For example, Amazon has 85M customers that purchase products requiring installation - this would be a low acquisition cost as it targets these customers for local service say on checkout.

FLN offers local jobs to its 15m users as one if it options in posting or selecting jobs.

Opportunity for FLN - increase revenue growth and enhance margin

FLN's purchase of Escrow.com is strategic and synergistic.

Aligning and modifying Escrow.com's payments platform so it better matches with the requirement of FLN's customers and other third party business users.

A salient example of a marketplace acquiring a payment system was eBay's purchase of Paypal.

As with Paypal, FLN will continue to run Escrow.com as a standalone business. This is especially important in growing business with third parties.

The revenue growth of Escrow.com in the past two years falls well short of what one would expect in a dynamic online payments field.

Escrow.com's low margin indicates ample opportunity for FLN to enhance this given its track record

Earnings and Valuation

We have incorporated Escrow.com in our model. While sales forecasts have increased, there is no material change to our NPAT forecasts in the next four years, as we assume any earnings will be channelled into investing in both Escrow.com and the core business.

However our NPAT forecasts post 2019 have increased. We have made no changes due to Local Jobs at this stage.

Our valuation has increased to $1.60/share from $1.35.

This is due to 1) Adopting a purely DCF approach; 2) Rolling forward our model by six months; and 3) The longer term earnings impact of Escrow.com.

These more than offset the dilutionary impact of the recent share placement on our NPV.

Earnings revisions - increase in sales but NPAT unchanged in near-term

We have incorporated Escrow.com in our model. We conservatively assume sales growth of 4% p.a. for this business.

However we believe risk to revenue growth is to the upside, especially under the stewardship of FLN.

At the EBIT level we assume break-even, expecting that Escrow.com's earnings will be funnelled into marketing and development costs for both it and the exiting FLN business over the next four years.

Consequently, our NPAT estimates are materially unchanged for the next four years. However post 2019 our earnings forecasts have increased.

We have not changed any of our estimates due to the launch of Local Jobs at this stage, adopting a conservative approach. Again, we believe risk lies to the upside.

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