Company Overview: Redbubble Ltd is an Australia-based company, which operates an independent designers' marketplace. For men, the Company offers T-Shirts, Classic T-Shirts, Tri-blend T-Shirts, Graphic T-Shirts, V-Neck, Long Sleeves, Tank Tops, Hoodies, Lightweight Hoodies, Sweatshirts and Lightweight Sweatshirts. For women, it offers T-Shirts, Chiffon Tops, Contrast Tanks, A-Line Dresses, Graphic T-Shirt Dresses, Fitted Scoops, Fitted V-Necks, Relaxed Fit, Tank Tops, Hoodies, Leggings, Scarves and Mini Skirts. For kids, the Company offers Kids T-Shirts, Baby T-Shirts and Baby One-Pieces. The Company also offers cases and skins, such as iPhone Cases, iPhone Wallets, Laptop Skins and Laptop Sleeves; stickers; wall art, such as Posters, Canvas Prints, Photographic Prints, Art Boards and Art Prints; home decor, such as Throw Pillows, Duvet Covers, Mugs and Clocks; stationery, such as Greeting Cards, Postcards and Calendars, and bags, such as tote bags, drawstring bags and studio pouches.
 

RBL Details

Decent Performance in FY19: Redbubble Limited (ASX: RBL) is a global online marketplace which helps in facilitating sale and purchase of art and designs on numerous products between the independent creatives and consumers. As on August 6, 2019, the market capitalisation of the company stood at ~A$366.3 million. The company recently informed the market about the strategic and financial updates for Q4 FY19 and full year to June 30, 2019. The company’s FY 2019 financial performance reflected the core strengths of the marketplace and the company also benefited from the management discipline throughout the P&L and the value of TeePublic acquisition. In FY19, the marketplace revenue stood at $257 million, which reflects a rise of 41% while gross profit came in at $95 million, which implies an increase of 48% on Y-o-Y basis. The company stated that the marketplace revenue growth was witnessed because of the accelerating TeePublic business. It was added that the results from the strategic investments lay groundwork for the return to healthy growth in the top-line.


FY19 Financial Highlights (Source: Company Reports)

The company’s FY19 marketing spend reflected 10.5% of the marketplace revenue, which was below as compared to many online marketplaces / e-commerce peers. The company’s total cash inflows for FY19 stood at $7.8 million as compared to the cash outflow amounting to $6.6 million in FY18. Out of this, the company’s FY19’s free cash outflow stood at $3.1 million, which implies an improvement from $6.9 million, which demonstrates the cash discipline. As at June 30, 2019, the closing cash balance stood at $29.0 million. Redbubble Limited recently advised that Grant Murdoch has made an announcement about the intention to resign as Non-executive Director of the company at the end of 2019 Annual General Meeting in the month of October. We are positive on the business prospects as it focuses on strengthening its relationships with artists, launching new products to expand market reach, scaling customer growth powdered by brand, and creates content partnerships to increase sales potential for commercially-oriented segments.

Top 10 Shareholders: The following table provides a broader overview of the top 10 shareholders of Redbubble Limited:

Top 10 Shareholders (Source: Thomson Reuters)

YoY Improvement in Key Margins: The company has witnessed improvement in the key margins in 1H FY19 on a YoY basis which reflects the improving position of the financials and which further strengthens the confidence in the company’s core business activities. It looks like that the company has reduced its exposure towards the debt component as its Debt/Equity ratio stood at 0.02x, which reflects a fall of 60.9% on a YoY basis. Also, the percentage of long-term debt to total capital stood at 1.4%, which implies a fall of 2.3% on a YoY basis.


Key Metrics (Source: Thomson Reuters)

It can be said that the company has been reducing the debt which might help it in stabilising its balance sheet position and could place it well to achieve long-term growth. Generally, the lower debt can act as a catalyst as it reduces the company’s commitments.

Improvement in Business Fundamentals: The company stated that it is making progress in the areas of strategic investment which are critical to the long-term marketplace growth and profitability. With respect to artists, the company stated that the product revenue from the authentic sellers at RBL witnessed a rise of 39% in FY19 and is representing 76% of the Redbubble product revenue. The company on-boarded a total of 48 brands, added 25 new brands in the Q4 FY19, and volume of the licensed content rose to 350,000, which reflects a rise of 46% on Q-o-Q basis.

With respect to TeePublic business, the company added that it had witnessed significant progress throughout the aspects like content partners, supply chain improvements, paid marketing, improving margins, etc.

Overview of 1H FY19 Performance: The company posted positive operating EBITDA amounting to $5.8 million while the free cash flow stood at $25.8 million in 1H FY19 which implies an increase from $18.1 million in the prior comparative period. The company’s cash balances were enhanced by $57.1 million, which were raised for the TeePublic acquisition. An initial settlement payment amounting to $49.3 million (or US$35.0 million) was made in the month of November and the final instalment which involves an amount of US$6.0 million is due to be paid in the month of May 2020.


H1 FY 2019 Income Statement Summary (Source: Company Reports)

The company stated that the operating costs were in line with the anticipations, and there was disciplined decision making to control the costs in response to softening of the revenue growth. The deployments towards automation and business process design in customer support are helping to slow the volume-based cost growth.

Robust CAGR Growth Witnessed in Top-Line: The company has witnessed a CAGR growth of 39.26% in the top-line between the time frame of FY14- FY18 which reflects that the company has decent capabilities to generate revenues. It looks like that the company has decent capabilities to build cash levels as it has witnessed a CAGR growth of 41.34% between the time frame of FY14- FY18. As a result, RBL is possessing robust capabilities to generate cash and sound capabilities to garner revenues.

The company’s cash from operating activities has witnessed an increase from A$0.17 million in FY15 to $2.34 million in FY18 and, thus, it can be said that the company’s operational capabilities have been significantly improved which could act as potential growth catalysts moving forward. Additionally, these capabilities might also help the company in witnessing respectable growth in top-line moving forward, which might attract the attention of the market players.

Talking about the balance sheet position, the company has witnessed a CAGR growth of 15.29% in the cash and short-term investments between FY15- FY18. During the same time frame, the company’s total current asset base has also witnessed improvement. As there has been a fall in the company’s Debt/Equity ratio in 1H FY19 on a YoY basis (as stated above), it looks like that the company has been deleveraging its balance sheet which could further stabilise the balance sheet standing.

What to Expect From RBL Moving Forward: The company is focusing on long-term growth in a large addressable market. The business has demonstrated progress throughout numerous strategic initiatives which are aimed at diversifying the sources of growth as well as profitability. The company’s priorities revolve around growing the customer base as well as increasing loyalty, building deeper relationships with the authentic artists and launch as well as expand content partnerships. The company has a huge addressable market, and the following would help in this regard:


Addressable Market (Source: Company Reports)

The company stated that it would no longer be providing specific short-term financial guidance. The business is focused towards strategic work to reach a milestone of $1 billion with respect to sales, and the current economics demonstrate that it could be profitably achieved. Additionally, the company is possessing decent capabilities to generate revenues which could help it in achieving growth in the long-term. The company’s priorities also include maintaining the robust growth and synergy value of TeePublic and leveraging the new product.


Key Valuation Metrics (Source: Thomson Reuters)

Stock Recommendation: The stock of Redbubble Limited has delivered the return of 48.19% in the span of previous six months, while in the time span of past three months, the stock’s return stood at 40.20% which can be considered at respectable levels. The company’s priority is to persist in the current discipline in order to improve the take rate, extract the maximum value from the marketing channels, as well as maintain the operating expenses and cash discipline. The company has witnessed a CAGR growth of 25.68% in its total assets base in the time frame of FY15- FY18 and reflects some sort of improvement in the company’s balance sheet. There are expectations that the company’s improved base of total assets and focus towards deleveraging the balance sheet might act a tailwind moving forward. Hence, considering the aforesaid parameters, we give a “Buy” recommendation on the stock at the current market price of A$1.390 per share (down 2.797% on 6 August 2019), and expect a high single-digit to low double-digit growth over the next 24 months based on potential improvement in PE (double digit) and positive earnings profile.

 
RBL Daily Technical Chart (Source: Thomson Reuters)

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