Company Overview: Redbubble Limited (ASX: RBL) owns and operates the Redbubble and TeePublic online marketplaces, through its websites at Redbubble.com and TeePublic.com. The marketplaces make it possible to facilitate the sale and purchase of art and designs, sold by creative artisans to its consumers. Through the platform, the independent artists are able to profit from their creativity and make available its products to a diverse customer base.

RBL Details

Robust Growth in Revenue Due to Increased Platform Activity: Redbubble Limited (ASX: RBL) is an online marketplace that connects creative artisans and consumers. The market capitalisation of the company, as on 11 May 2021, stood at ~$1.07 billion. The company is driven by the philosophy that consumers are less interested in wearing the same conventional T-Shirt owned by others and is instead interested and will look for meaning and uniqueness in what they buy. This brings the company’s role into the picture, which provides a popular marketplace to fulfil the consumers’ needs for uniqueness, and also provides a platform for the community of creatives to sell their products.

The medium-term aspiration of the company is to achieve over $1.5 billion in Gross Transaction Value, along with $1.25 billion in marketplace revenue. It also plans to achieve $250 million in artist revenue in the near term.

During the period YTD FY21, the company reported decent growth in key financial metrics. The marketplace revenue grew by ~85% to ~$456 million when compared to the previous corresponding period. The gross profit also increased by ~100% to ~$184 million during the same period under consideration. RBL posted an EBITDA of ~$51 million in YTD FY21, compared to a loss of ~$2 million in FY20. The operating cash flow improved to ~$54 million, from a level of ~$6 million in FY20. It ended the period with a closing balance of $102 million as of 31 March 2021.

YTD FY21 Financial Performance (Source: Company Reports)

During Q3FY21, the company reported a marketplace revenue of ~$103 million. The Gross Transaction Value stood at ~$134 million during the period. There was an increase in the gross profit to ~$40 million, an increase of ~55% on a floating currency basis when compared to the previous corresponding quarter.  There was also an improvement in EBITDA level to $2.2 million during the period.

Q3FY21 Financial Performance (Source: Company Reports)

Unique Business Model to Complement Growth: The company’s unique business model positions it well to address the ~US$300 billion market in core geographies and product categories. It projects ~35 – 40% customers within its core markets are seeking something unique and meaningful in their e-commerce spend. As per the company, this section of people is likely to outpace market growth as the sale of personalised and unique products begin to gather more steam. Its objective is to deliver value to artists and inspire them to create more unique content. In the process, it plans to drive top line growth through customer acquisition and scale its network to enhance customer experience and also improve on the unit economics.

Business Flow (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders together form around 50.29% of the total shareholding, while the top 4 constitute the maximum holding. Jellicom Pty. Ltd.  and Kayne Anderson Rudnick Investment Management, LLC are holding a maximum stake in the company at 8.86% and 7.19%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Key Metrics: In H1FY21, the company reported improved performance when compared to the previous corresponding period. EBITDA margin improved to 12.3% during the period, from a level of 2.3% in H1FY20. There was also a significant improvement in the net margin of the company to 9.8% in H1FY21, compared to a negative 1.4% in the previous corresponding period. ROE of the company stood at 45.5% during the period. There was an improvement in the leverage of the company, with the debt-to-equity ratio at 0.07x in H1FY21, from 0.15x in H1FY20.

Growth Profile and Profitability Metrics (Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)

Key Risks: The company’s business success and efficiency are dependent on the performance of its marketplace online platform. As such, any disruption to it or any technological malfunction can affect the operations and profitability of the company in the short term. Its line of business also makes it prone to stiff competition from other players in the space. Hence, the company has to continuously look for enhancing the customer experience and try to keep up with latest retail trends in the space. As a technology-driven company, RBL is also exposed to the risk of a security breach of its clients and company data. The company has been benefitted by the onset of the COVID-19 pandemic, which has accelerated the shift of consumer shopping preferences to e-commerce. However, in the post COVID-19 phase, there might be a risk of the consumers switching back to the brick and mortar way of shopping. In this regard, the company has to look for creating a sustainable revenue stream for carrying out the business growth.

Outlook: The company plans to generate over $1.5 billion in Gross Transaction Value in the medium-term through organic investment and growth and will further look for M&A opportunities to amplify its objective. Its near-term objective is to acquire and engage the artists on its platform and also improve on the unique offerings. It will also look to have a better understanding of customer behaviour, which will help to drive user acquisition and transaction flows. It expects to achieve 40-42% in gross margins at marketplace revenue of ~$1.25 billion, and an EBITDA margin in the range of 10-15%, from CY24 onwards.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:  The company plans to increase its growing base of customers through brand marketing to increase awareness and also expand into new geographies. As such, it is planning to carry out a disciplined investment phase in the short-term. As per ASX, the stock of RBL is trading below its average 52-weeks’ levels of $0.890-$7.350. The stock of RBL gave a positive return of ~8.40% in the past nine months and a negative return of ~8.60% in the past six months. We have valued the stock using a P/E multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at a slight premium to its peer median P/E (NTM trading multiple), considering the benefits of investments in the longer term, robust financial performance, unique business model and the presence of a large addressable market. For the purpose, we have taken peers such as Kogan.com Limited (ASX: KGN), Lovisa Holdings Limited (ASX: LOV), Adore Beauty Group Limited (ASX: ABY), to name a few, which comes under the online retail space. Considering the expected upside in valuation and current trading levels, impressive YTD performance, meaningful & unique business model and optimistic prospects for the sector, we recommend a ‘Buy’ rating on the stock at the current market price of $3.600, down by 8.164% as on May 11, 2021.

RBL Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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