Company Profile: Redbubble Limited (ASX: RBL) is a creative online place which facilitates the sale and purchase of art and designs on a range of products between independent creatives and consumers. The Redbubble Group owns and operates the leading global online marketplaces hosted at Redbubble.com and TeePublic.com, and sells uncommon designs of high-quality, everyday products such as apparel, stationery, housewares, bags, wall art and so on. The company segregates its revenue on the basis of geographies with revenue reporting in Australia, United States, United Kingdom and rest of the world.


RBL Details 

Strong Fundamentals and Decent Increase in Marketplace Revenue: Redbubble Limited (ASX: RBL) is a creative online place which facilitates the sale and purchase of art and designs on a range of products between independent creatives and consumers. As on 28 April 2020, the market capitalization of the company stood at ~$211.62 million. RBL has a diverse product catalogue and is well-positioned for growth. The company is serving ~5.4 million customers and is generating an overall GTV (Gross Transaction Value) of $328 million. During FY19, marketplace revenue of the company went up by 34% and stood at $257 million, and it had generated its first positive operating EBITDA of $3.9 million since IPO, without compromising on the strategic investments for the long term. In the same time span, the company witnessed 39% of sales growth from authentic sellers and 109% of sales growth from its members. This resulted in the gross profit to increase by 48% to $95 million in FY19, which outpaced the growth of 34% in operating expenses. This was mainly due to cost discipline and the focus of the company on productivity and growth investing. RB group continued to demonstrate its progress in the half year ended 31 December 2019, wherein it reported an increase of 26% in marketplace revenue to $180 million. During the half-year, the company reported an increase of 27% in gross profit to $66 million and an improvement of $1.1 million in EBITDA to $4.3 million. The decent financial performance was mainly because the marketplace maintained its economics despite the recent growth headwinds. The business has established decent fundamentals and is committed to investing and realizing its full potential. 

The company has clear opportunities for growth owing to its deep relationships with customers, authentic content and new products. The RB group made progress in the strategic investments which are necessary for long-term growth and profitability.

Redbubble is a company with huge potential and is prioritizing growth in customer base and increased loyalty in the longer term. The company expects to push out additional products in the coming years and expects to create more value for the customers who are already in the company’s ecosystem. The company has a runway of opportunities which will continue to increase on hitting specific goals.


1H20 Financial and Operational Highlights (Source: Company Reports)

Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of Redbubble Limited. Jellicom Pty. Ltd. is the largest shareholder in the company, with a percentage holding of 10.97%.

Top 10 Shareholders (Source: Thomson Reuters)

Well Management of Costs and Financially Stable Balance Sheet: Over the span of 2 years, gross margin of the company witnessed an improvement and stood at 31%, up from 28.9% in 1H18. During 1H20, net margin of the company witnessed a substantial improvement over the previous half. The increased gross and net margin of the company indicate that the company is managing the costs well and is capable of converting its revenue into profits. In the same time span, EBITDA margin of the company went up to 2.3% from a negative margin in the prior half, indicating increased profitability. During 1H20, Return on Equity of the company witnessed an improvement over the previous half, which indicates that the company is well managing the capital of its shareholders and is capable of generating profits internally. In the same time span, current ratio of the company went up to 0.89x from 0.73x in 2H19. This indicates that the company is liquid enough to pay off its current liabilities using its existing assets. During the half-year, Debt/Equity ratio of the company was 0.15x as compared to the previous half’s multiple of 0.18x. This shows that the business is financed with a significant proportion of investor funding and a small amount of debt, resulting in a financially stable balance sheet.


Key Margins (Source: Thomson Reuters)

RB Group Marketplace Revenue Growth Of 20% in 3Q: The company has recently provided its financial and business updates for the third quarter ended 31 March 2020 wherein it continued to benefit from increased online activity with stronger sales growth. RB group has reported marketplace revenue growth of 20% from a combination of a stronger than anticipated start to the third quarter and consumer reactions to COVID-19. On YTD basis, gross profit of the company witnessed an increase of 28% and stood at $91 million, and operating EBITDA went up to $6.8 million, reflecting a growth of 39% on the prior corresponding period. The company has undertaken certain cost control measures and reported free cash outflow of $0.4 million. RB group remains confident that it has a solid financial position with a cash balance of $31.9 million as at 31^st March 2020.

Given the sales trend and ongoing uncertainty with respect to COVID-19, the company is well responding to changes in macro conditions and has sufficient balance sheet strength to meet ongoing business needs. It has benefited from a shift to online shopping with a robust supply chain. 


Financial Summary for the Nine Months (Source: Company Reports)

Future Expectations and Growth Opportunities: Despite the ongoing uncertainty in the environment from COVID-19, the group retains a solid balance sheet position with enough financial strength to meet ongoing business needs. The company is delivering against important strategic and tactical priorities, including adapting learnings from TeePublic to Redbubble in the areas of Search Engine Optimization and increasingly in artist recruitment and account management. The business remains focused on short term execution consistency and delivering on growth investments in the long term. The company expects to benefit from consumer reliance on an online platform and is positioning itself to take the best advantage of the circumstances that emerge.

RBL staff has shown resilience during the global pandemic and has demonstrated that they can work effectively from home and deliver against the priorities. RB group remains committed to ensuring pre-COVID growth initiatives and is working on several levers which can be utilized to respond to changes in macro conditions. The company is powered by high quality content and launching of new products. The company is prioritizing to improve the customer experience and increase investment in fast growing Content Partnerships and licensed fan art segment. 


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: EV/Sales Multiple Based Relative Valuation Approach (Illustrative)

EV/Sales Multiple Based Relative Valuation Approach (Source: Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: As per ASX, the stock of RBL gave a return of 62.0% in the last one month and is trading towards its 52-weeks’ low level of $0.4, proffering a decent opportunity for accumulation. Over the span of 4 years, the company witnessed a CAGR of 44.15% in total revenue and a CAGR of 40.72% in gross profit, indicating long term growth and profitability in the marketplace. The company is tapping shift towards personalization and has a huge addressable market. It is giving positive signals and is inspiring artists while witnessing economies of scale. Considering the returns in the last one month, attractive trading levels, improvement in key margins, decent growth opportunities and resilience of the business despite the global pandemic, we have valued the stock using EV/Sales multiple based illustrative relative valuation approach and have arrived at an indicative target price with an upside of lower double-digit (in percentage terms). For the said purposes, we have considered Baby Bunting Group Ltd (ASX: BBN), Mosaic Brands Ltd (ASX: MOZ) etc. as peers. Hence, we recommend a “Buy” rating on the stock at the current market price of $0.84, up by 3.704% on 28 April 2020. 

 
RBL Daily Technical Chart (Source: Thomson Reuters)

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