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Freelancer Founders lapping up unwanted shares

Sydney based Freelancer (FLN.AX), is the world’s largest online freelancing and crowdsourcing marketplace.  Since listing on the ASX in November 2013, the Company has more than doubled its users to 26 million, and increased annual revenue by 395% to A$52.7 million.  Despite what seems to be a stellar result for the tech start-up founded by Matt Barrie back in 2009, the share price has fallen from the 15 November 2013 opening price of A$2.50 all the way back to today’s closing price of A$0.53.  Just 3 cents higher than the initial public offering.

But it seems Barrie and founding investor Simon Clausen still have faith in the outlook.  Nearly A$2.4 million worth of faith to be precise.

Between March and November this year Clausen and Barrie have bought on market just over 3.8 million shares, increasing their ownership collectively to 77% of the Company at an average price of A$0.61 per share.

They still have a long way to go before they buy back the A$35 million worth sold back in 2015 at $1.40 per share, which according to Barrie was at the behest of the bankers that ‘begged’ him to increase liquidity (Caitlin Fitzsimmons, Australian Financial Review 5 August 2015).

Perhaps the reason for the weakness is the proceedings currently before the Federal Circuit Court brought by former employee Matthew O’Kane (Misa Han, Australian Financial Review 25 October 2017), however even with that in mind I struggle to comprehend that after multiple acquisitions, a fourfold increase in revenue, and doubling the user base that Freelancer could be worth only a mere 9.6% more than what was affirmed by a bunch of investment bankers when they underwrote the IPO back in 2013.

A review of the Company’s recent announcements did provide some reasons to be pessimistic; such as flat earnings growth and a tough first half FY2017, but it also gave many reasons to be optimistic.  Despite an 18% drop in gross payment volume across the Freelancer platform and a 24% drop across ‘Escrow.com’, (a payment facilitator acquired by the group in 2015), net revenue remained unchanged versus the previous corresponding period.  The decline in Escrow payments was said to be the result of system features being turned off for upgrades in January 2017, and some user attrition after implementing identification checks to increase anti-money laundering security.  Effectively the ‘Paypal’ of high-end goods, Escrow holds the buyer’s funds for the seller until the purchased goods are sent to, and approved by the buyer.  The nominal fee charged for the service is a small price to pay to reduce transaction risk for both parties.  Even ebay.com endorses the platform on their website stating, “You should only use Escrow.com, ebay’s approved escrow service.”

Also announced was the release of the Escrow API, an interface that allows developers to easily integrate and use Escrow’s payment platform.  As the propensity for consumers to make purchases online increases, as does online fraud, I would assume a trustworthy payment facilitator would be a welcome addition to any high-end online marketplace.

Prior to the market update in October this year that saw the price rally 28%, critics called Freelancer the fallen tech star reporting that for the share price trend to turn, the Company needs to return to growth (John McDuling, Sydney Morning Herald 9 October 2017).  The second half of FY17 might be the turn of the tide on the back of the cryto-currency boom as the Company noted an 82% increase in the demand for Bitcoin specific skills by platform users (Freelancer Press Release, 25 October 2017).  It will also be the moment of truth for the changes implemented across Escrow and Freelancer during the year to see if they produce the required results.

Given that almost 82% of the outstanding shares are held by the top shareholders, I would imagine if the 2H17 report demonstrates a return to growth that the move to the upside will be substantial.  For that reason, I have added my name to the registry by purchasing a parcel at $0.62 on the day of the API announcement.  In hindsight it appears that I may have bought too soon, but I will be looking to add in the coming days hopefully in the low $0.50’s.

Regardless of my confidence, the question remains as to whether the recent on market buying by Barrie and Clausen is a sign of good times ahead, or simply blind optimism from the proud parents.

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Fletcher Building Engages KPMG to Conduct Internal Review

Fletcher Building Products (FBU) provides a range of building and construction services with a large foothold in the New Zealand residential development and infrastructure sector.  Helped along by the Australian and New Zealand residential construction booms, the share price for FBU almost doubled between February and September 2016 and management continued to impress shareholders with earnings upgrades and consistent business growth.

However, in March this year a full year earnings downgrade was announced to the market, citing unexpected costs on some current projects that were eroding profit margins.  Alarm bells started ringing.  Generally when construction companies tender for projects they use assumptions to produce cost estimates, and these assumptions will normally be used for all estimates until pricing changes or historical data from completed projects calls for an amendment.  At the time we flagged that the under-estimation of construction costs would have likely extended further than just the few projects currently underway, and that there was a risk that further downgrades might be forthcoming.  Here is the footage of our Director David Manchee explaining our thesis on Sky Business News the day the company made the initial announcement.

Last week management announced that global accounting firm KPMG had been engaged to ‘conduct a review of the two largest projects in its B+I business and the two largest projects in its Infrastructure business’.  I hope for all shareholders the result of this review will determine that we were wrong, and that future projects will not suffer the same fate but all we can do now is wait and see.  Since announcing the initial downgrade, the share price for Fletcher Building has fallen 30%.

Significant market reactions to negative changes in outlook is becoming the new norm, and for our clients we have added value by taking money off the table as soon as downside risk becomes the overarching factor.  In some cases we will repurchase the same companies at a later date but once the risk returns to the upside and most times for a discount to the original sale price.  If you would like to know more about how Belvedere may add value to your investment portfolio, please add your details below and we will be in touch.

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BWX Limited Acquires US Based Mineral Fusion


BWX Limited is a listed company which owns, manufactures and distributes a range of beauty and skin care products. The range of Sukin products in particular is the Company’s most successful range.  In addition to being priced affordably, the range is made with naturally derived ingredients, cruelty free and vegan, appealing to the growing market of socially and environmentally conscious individuals.
BWX caught our eye in early 2016 as a company with great potential, boasting a compound annual growth rate of almost 30% year on year, a unique offering, solid management and fantastic outlook. Their Sukin range of natural cosmetic products had been well accepted by the market in Australia, and demand quickly spread to include North America, China and the U.K with products now featured in the Boots & Co. chain of chemists.  The Company also maintains a strong Daigou (grey market exports) sales channel and has products featured on a number of Chinese e-commerce platforms, with plans to solidify the Chinese expansion strategy during calendar year 2017.

This week the board announced the US$38.4 million acquisition of California based Mineral Fusion LLC, providing the Company with a strong footing in the US market for their well performing Sukin brand.  This purchase also provides access to Amazon and Wholefoods which Mineral Fusion has current standing contracts.  In fact, management made mention that the Mineral Fusion are also achieving 30% compound annual growth rate in sales volume, and achieves 10 times the average dollar return per area of shelf space in the Wholefoods stores.  This acquisition adds to their vertical integration strategy after adding Lightning Brokers, a national distributor of skincare products to their portfolio in February 2016.Monday’s conference call once again provided confidence that management have well and truly got their finger on the pulse with guidance re-affirmed for the full year FY17.

That being said, BWX is a young, smaller company expanding very quickly and the current valuation reflects this growth. With such growth, particularly into International markets, there is always execution risk.  Acknowledging this risk, there is also considerable upside in this sector which is fast growing globally.

Although we still remain positive for the outlook of the company, we have taken some profits after the recent announcement given the fast run up of the share price and expect a pull-back which will provide the opportunity to add again, or an entry.  Either way we intend to continue to follow the BWX story very closely as in this competitive investment market, it is difficult to find attractive growth stories that aren’t quickly engulfed by the “crowded trade”.

If you would like some more details about BWX or other less covered companies in our watch list feel free to contact us.

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Codan Limited Upgrades Guidance

Codan Limited today announced that they expect to outperform their FY18 profit guidance of $20-$25m.  It was reported in the announcement that the Company will likely achieve a first half profit of around $15 million and that historically their second half profit exceeds that of the first.

I have been following Codan for some time and started buying in the past few weeks.  Here are the reasons why Codan appealed to me as an invest-able Company:

 1. The valuation is appealing

At the current price Codan trades at around 5 times EV/EBITDA and a price/earnings of circa 9 times.  Acknowledging that the Company has experienced lumpy earnings over the years, these metrics are based on what management refer to as their “base-level” business and seems quite conservative.

2. Codan have been in business for over 50 years

The business was founded by three university buddies in 1959 and one of the founders is still the Company’s largest shareholder.  This says to me that management and the board are experienced and prepared for changes in business cycles, as they have likely seen many over the years.  Additionally, governments often look for long-standing ownership and management when awarding contracts because stability is an important factor given that government approval process can be lengthy, and trying to shift suppliers quickly if one were to fail to perform is difficult.  Not surprisingly, Codan has standing contracts with the United States government, supplying military communication equipment.

3. Diversified portfolio of products

Last year’s record result was primarily attributed to their Minelab metal detectors and the overwhelming demand received from their expansion into the African market.  Before making the decision to invest, I thought I would drop into the local gold prospecting equipment retailer and see what I could find out.  The veteran shopkeeper had nothing but good things to say about the Minelab products, including their innovation, durability and after sales support.  In his opinion they are the best currently on the market.

Other products include radio communication and defence electronics, but what I find more exciting is Minetec, a real-time underground scheduling and monitoring system that improves safety and productivity.

Click here to watch the Minetec explanation video.

Recently there was speculation that the Company had landed a large mining player as a new Minetec customer, but the Company responded by saying that there were in negotiations but no agreement had been formed as yet.

4. Strong balance sheet

After a bumper result in FY17, the board decided to payout the excess cash generated to shareholders via a special dividend.  Total dividends paid for the year were 13 cents per share.  Given that the Company has no debt, another stellar result will likely result in the same outcome.  Moelis seem to have the same opinion in their research report, forecasting a full year FY18 dividend of 10 cents per share or 4.6% based on yesterday’s closing price.  Oh, and did I mention the Company has no debt.


I don’t think there is a lot of downside here, and that the only reason the share price isn’t higher is that this is a lesser known Company in what most would consider a boring industry.

It seems I am not the only one with this opinion, Cannacord Genuity  recently produced a research report forecasting a full year 2018 net profit after tax of $31 million and I tend to agree, maybe even slightly higher.  Like Moelis, Cannacord’s price target is $2.60.

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Trump’s Market Effect is Profound

Trump’s victory has had a profound effect on not just US markets but global stocks and bond markets. In Australia some stock segments are up dramatically, whilst bond and bond type stocks (for example real estate funds, utilities and infrastructure companies) are being de-rated. Whilst there has certainly been a lot of commentary about the causes, this is our take on the reasons and why the trends of the last 8 years have now changed.
After years of increasing regulation and higher taxes, business confidence in many industry segments was on its knees and private investment has been stagnant. Whilst politicians have been  talking  the positives of greater consumer protection  and green energy, they weren’t acknowledging  the negatives of higher energy costs to manufacturing and the debilitating effects of greater and greater regulation. Companies around the world have not been investing in expansion and banks aren’t lending to business projects. Hence economic activity has been stagnant and there has been enormous under employment around the world.
Hardly anyone gave Trump a chance of winning the US Presidential Election and no one thought he could win in a fashion that provides the Republicans control of both houses of parliament. Media concentrated on the personal side and not policy whilst voters clearly did the opposite. He is pro-business and investment and hence American jobs. He may be morally questionable but his policies are offering hope (aka jobs in political terms) to large parts of the US that have had 8 years of economic quagmire, and subsequently the same to investors in equities. Consider the economic potential of these three policy changes-
1. Infrastructure
It is estimated that the US has been under-investing in infrastructure for 30 years, so there is no shortage of excellent projects that will improve the productivity of the country, not to mention create a lot of traditional construction jobs.  The question is always how to fund them. US global companies have large sums held outside the US and have been discouraged to return the funds due to tax impediments. Trump has offered these companies tax credits which will offset the tax liable if the funds are invested in US infrastructure.  As most infrastructure projects like roads are tolling, banks are happy to lend the majority of the construction cost. The funds coming onshore and invested to get the tax credits will provide the balance. Hence Trump has a very real chance of funding the US $1 trillion infrastructure projects.
2. Support for the traditional energy sectors
This will include coal and fracking for oil and gas. This will create serious jobs and have the effect of lowering the cost of energy in the US. Given a major cost of manufacturing is energy it will have the effect of making US manufacturing far more globally competitive.
3. Banks
Trump has openly stated his outrage that very few Bank execs were punished for their actions leading to the GFC. However he is pragmatic and knows as a developer, the banks need to be encouraged to lend to traditional industry and to new projects. He has already stated he believes the overriding restrictive policies placed on banks globally have gone too far and he will lighten the reigns. This policy change will be extremely positive for economic activity as more businesses receive expansionary funding.
Individually any of the three policies are positive for US economic activity and far greater than other economic policy that has occurred for years. Collectively they are huge. As investment increases and wages grow the multiplier effect is even greater.
The global positives are that he has rewritten the political landscape. It will make politicians far more aware of the need to provide plausible policy to encourage jobs and wage growth across the country. There are a number of  elections and issues in Europe and Trump will have to back down on his aggressive trade threats, but there is a real upside to global growth now that hasn’t been there since the 2008 GFC, and that is very positive for business.
A stronger US economy will be clearly positive for Australian businesses with operations in the US. Further, as the largest economy in the world any US pickup has an impact on trade and economic development globally. The uptick in our resource stocks is a prime example of the market believing demand for base metals such as Iron ore and copper will increase.
Australian Portfolio Positioning.
Our clients trust us to manage their Australian share portfolios and in doing so it is our role to be overweight sectors we believe in, and to avoid sectors that either look to have headwinds in their business or have a valuation based risk. Over the last few months the overall All Ordinaries Index has declined and risen again. Beneath this, there have been dramatic changes in the values of different sectors. Simplistically, banks and the large resource stocks are up around 20% while infrastructure and real estate type companies (referred to as Bond proxies) are down 20%. Other darling sectors such as Telcos have been hit even harder on valuation questions.
Recognising the change in global sentiment and markets is imperative. We cannot pick daily movements so we look to what sectors will have tailwinds and hence investor demand, and which will not. Accordingly we continue to hold our banks and the majority of holding in the large mining companies as they are still under owned and globally there is a scramble to gain exposure. Conversely all things being equal the bond proxies will have bounces but it is likely that rates will be heading up and therefore their medium term trend will be down.
The sectors that are catching our attention are now the cyclicals which would benefit from a growing US and international economy when they are priced for low growth. Stock selection and timing have become the new imperative to portfolio management.
If you would to discuss portfolio management in more detail, please send us an email or call.

David Manchee
Belvedere Share Managers