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

First Positive Operating EBITDA Profit: Redbubble Limited (ASX: RBL) facilitates the sale and purchase of art and designs on a range of products between independent creatives and consumers through its websites at Redbubble.com, TeePublic.com and three foreign language Redbubble.com websites. As on 21 January 2020, the market capitalisation of the company stood at ~$272.96 million. In the recently held Annual General Meeting, top management stated that Gross Transaction Value (GTV) of the company stood at $328 million. The company is propelled by a large community of ~1 million independent artists for 5.4 million unique customers and witnessed a CAGR of 41% over the span of 4 years from FY15 to FY19. Redbubble Limited is building deeper relationships with customers which resulted in strong sales growth and marketplace revenue of $257 million, up by 41% on the prior year. During FY19, the company generated its first positive Operating EBITDA profit of $3.8 million since IPO, reflecting an increase of $7.7 million from a loss of $3.8 million in FY2018. RBL has shown the core strengths of the marketplace while benefiting from management discipline throughout the income statement, leading to a gross profit of $95 million, up by 48% on the previous year. Growth in gross profit outpaced the growth of 34% in operating expenses. The company has launched 5 new products namely - throw blankets, bathmats, shower curtains, glossy and transparent stickers in Q4 FY19 post the completion of re-platforming work, resulting in efficient and rapid product launches. The acquisition of TeePublic realized $1.3 million in benefits over the period from November '18 to June '19. This doubled the company’s US t-shirt business overnight and helped it gain additional value from the entire supply chain. RB Group has a huge addressable market of ~US$280 billion and expects it to grow by 10-14% p.a. in 2020.

The RB Group has on-boarded 48 brands in total, with 25 new brands in the last quarter of 2019. In addition, licensed content went up by 46% from 3Q, with a total of 350,000 works. The company has witnessed a growth of approximately 140% in marketplace revenue from the iOS app and is working on the development of the Android app. 

The company is aiming for long term growth in a large addressable market and showcased progress across several strategic initiatives with a target to diversify the group’s sources of growth and profitability. RBL is planning to launch and expand content partnerships with the world’s leading fan art brands and is expecting solid growth and synergy value of TeePublic, leveraging new products, onboarding content partnerships and geographic growth opportunities. 


FY19 Financial Performance (Source: Company Reports)

Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of Redbubble Limited. Jellicom Pty Ltd is the largest shareholder with a percentage holding of 11.02%.


Top 10 Shareholders (Source: Thomson Reuters)

Significant Improvement in Key Metrics: During FY19, gross profit margin of the company witnessed a slight improvement on the past year and stood at 30.8%, up from 29.2% in FY18. This indicates a healthy financial condition of the company and implies that the company can make reasonable profits on sales as long as it keeps its overhead costs in control. Over the span of 4 years from FY15 to FY19, EBITDA margin of the company witnessed modest improvement implying that the company now has smaller operating expenses in relation to its revenue which will help boost its profits. In the same time span, the company reported a stable financial position with Debt/Equity ratio of “Zero”.


Key Metrics (Source: Thomson Reuters)

Strong Operating Leverage and Positive Cash Flows: RB Group continued to witness strong growth rates from TeePublic and captured topline growth across both brands, Redbubble and TeePublic. During the first quarter ended 30 September 2019, marketplace revenue was in line with management expectations and went up by 43% to $70 million. The company also delivered strong operating leverage with a growth of 48% in gross profit and demonstrated its ability to achieve improvements in gross margin. It reported free cash flow of $7.8 million, improving from $0.4 million in 1Q FY2019 and is focusing on executing its four strategic initiatives to boost growth. In the same time span, EBITDA of the company stood at $2.2 million, reflecting an improvement of $4.0 million from a loss of $1.8 million in 1Q FY2019. 


Increasingly Profitability and Cash Generative (Source: Company Reports)

Performance post the Acquisition of TeePublic: The company generated scale and growth benefits from both its platforms and realized benefits worth $1.3 million in FY19. RB Group has diversified its supply chain and has managed to mitigate network risk. The company is leveraging Group functions in Marketplace Integrity, Finance, Legal and People & Culture and is enhancing artist tools and services, enabling an easier access to share content. The company is now a much bigger marketplace and is delivering great experience, which is hard to replicate. RBL, post the acquisition has diversified the product catalogue and is expecting to launch many more products in the coming years to build category leadership.

RB Group Launches ADR Program: The company recently announced that it has received approval from the US SEC (Securities and Exchange Commission) to establish the ADR Program, enabling the qualifying non-US companies to have direct exposure to the US investment community. For the said purposes, the company has appointed The Bank of New York Mellon as the nominated depositary bank. This program would result in gaining direct exposure to the US capital markets and investors. In another release, the company announced that it has entered into a new employment agreement with its CEO, Mr. Barry Newstead, bringing his remuneration in line with the new executive remuneration model of the Redbubble Group.

Growth Opportunities in RBL: The company is targeting long term growth with a large addressable market. It is prioritizing growth in the customer base and increased loyalty through personal “creative adventures” and member experiences. It is also focusing on building deeper relationships with artists and is targeting to reach the milestone of $1 billion in sales. The company will continue to explore additional opportunities such as sharing artist content and marketing insights to drive additional value, as well as leveraging off the company’s broader geographical footprint and its expertise in launching products. Redbubble Limited will continue to launch new products which is expected to bring strength across key areas.

The company is expecting more value from the customers owing to deeper relationships and is also building a roadmap for TeePublic to make some transition over the coming years. Going forward, the company is expecting to benefit from the operational capabilities and diverse content, that will enrich customer experience. Also, Redbubble Limited and its acquired company, TeePublic will continue to generate a lot of inbound organic search and social traffic, which is likely to minimize marketing costs. RBL is certain to hit some goals and move on to adding additional growth opportunities, involving looking at new areas, new channels to go to market, etc., which will provide additional services to existing users of the platform. RBL is also targeting expansion in Asia, which may call for additional inorganic pursuits on a highly selective basis.


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodologies:
Method 1: EV/EBITDA Multiple Approach

EV/EBITDA Based Valuation (Source: Thomson Reuters)

Method 2: Price/Cash Flow Multiple Approach

Price/Cash Flow Based Valuation (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 16.02% over a period of 6 months and a return of 5% in the past one month. The stock is trading close to its 52-weeks’ low level of $0.840 and offering a decent opportunity for the shareholders to accumulate and enter the market. Over the span of 4 years from FY15 to FY19, the company witnessed a CAGR of 44.15% in revenue and a CAGR of 40.72% in gross profit. The company has clear opportunities to propel flywheel for growth and build a business with long-term capabilities to prevail against rivals. The company has witnessed growth from both the supply and demand side of the marketplaces in FY19. RBL is tapping shift towards personalization, with further upside expected from improving customer engagement and loyalty. Considering the returns, trading levels, growth opportunities and increasing customer base, we have valued the stock using EV/EBITDA multiple and Price/Cash Flow multiple based relative valuation method and arrived at a target price of lower double-digit growth (in percentage terms). For the said purposes, we have considered Temple & Webster Group Ltd (ASX: TPW), Catapult Group International Ltd (ASX: CAT) and Mosaic Brands Ltd (ASX: MOZ) as peer group. Hence, we recommend a “Buy” rating on the stock at the current market price of $1.025, down by 2.381% on 21 January 2020.

 
RBL Daily Technical Chart (Source: Thomson Reuters)

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