Why Matt Barrie’s Freelancer.com will have to work hard to convince conservative Australian investors

James Thomson Editor

Why Matt Barrie’s Freelancer.com will have to work hard to convince conservative Australian investors

Published 15 October 2013 09:05, Updated 16 October 2013 07:47

Matt Barrie has a global business, but he’ll need to convince local investors of its valuation.Photo: Tim Bauer

463. That’s the number that sums up the prospectus of Matt Barrie’s Freelancer, which is likely to face an uphill battle to convince conservative Australian investors to take a punt on its unique model. It’s great to see that Barrie has decided to list his company on the ASX – he understands he will be something of a pioneer in terms of listed technology companies and he is willing to embrace that role. But it won’t be an easy path.The prospectus reveals, really for the first time, the hard financial data behind Freelancer, which has typically used the value of outsourced jobs completed on its platform – an impressive-sounding $1.2 billion – to represent its financial performance.

However, the actual revenue and profit booked by Freelancer is much different from that. The prospectus shows revenue in calendar 2013 is tipped to hit $18.3 million, well ahead of the $10.6 million recorded in 2012.

But while EBITDA is set to jump from $9.3 million to $16 million, net profit is forecast to fall from $728,000 and $471,000.

Given the company is expected to have a market capitalisation of $218 million when it offers shares at 50¢ a pop, the small net profit implies a forecast earnings multiple of 463 times.

That sort of multiple is likely to have many of Australia’s traditionally conservative investors saying “pass” when they look at the Freelancer float.

But it’s not the only thing about this float that marks it as being very different to any other company on the ASX.

Lack of peers

The most obvious is Freelancer’s actual business, which is essentially a marketplace that allows people to post a task – a graphic design task, a legal job, some coding – and have freelancers from around the world bid on it.

It’s not a difficult model to understand, but it is impossible to line up Freelancer against a comparable peer, which makes it a touch harder for investors to determine how Freelancer is valued.

A second “feature” of the Freelancer float is the board composition. There are just three board members. None are independent and Barrie will hold the role of chairman and chief executive, a big no-no under the ASX’s corporate governance guidelines.

It’s difficult to understand why Freelancer wouldn’t have strengthened its corporate governance by adding independent directors and an independent chairman – although the reasoning becomes clearer when you look at size of the IPO.

Small stake

Freelancer will raise just $15 million in its IPO, with the directors retaining a whopping 87 per cent of the company after it lists on the ASX. It could be argued that there simply won’t be many small shareholders who need to be represented by independent directors – although this is perhaps a bit short-sighted on the part of the company.

The small amount of money being raised here and the fact Barrie and his fellow directors will retain a vice-like grip over Freelancer’s share registry and decision-making might cause some investors to ask: why do an IPO at all?

The prospectus states four objectives: to accelerate growth; to attract and retain employees with shares; to provide greater liquidity for shareholders and to access equity markets to fund further growth initiatives. If the company is going to make good on its huge earnings multiple, surely the last will prove to be the most important.

If there is one company that will give Matt Barrie hope that investors can back a tech play, it is cloud accounting software provider Xero.

The New Zealand-based company has seen its shares more than triple in the past 12 months and on Monday it raised another $159 million to fund further growth. And unlike Freelancer, it’s not even profitable, having lost $NZ14.44 million ($12.67 million) in the year to March.

Clearly, Xero’s growth story and business model is very different to that of Freelancer, but the latter could argue its global market position makes its growth story even more attractive over the long term.

It’s an argument Matt Barrie will have to perfect as Freelancer heads for the bright lights of the ASX.