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: Redbubble Limited (ASX: RBL) operates through its websites which facilitate the sale and purchase of art and designs for a range of products between independent creatives and consumers. This community sells exceptional designs on high-quality, everyday products such as apparel, stationery, housewares, bags, wall art, etc.  As on 11 February 2020, the market capitalisation of the company stood at ~$304.16 million. In the recently held Annual General Meeting, the management stated that the company had generated its first positive operating EBITDA of $3.9 million since IPO, without compromising on the strategic investments for the long term. During FY19, marketplace revenue went up by 34% and stood at $257 million. 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. The company has clear opportunities for growth owing to its deeper relationships with customers, authentic content and new products. The RB group made progress in the strategic investments which are essential for long-term growth and profitability. The company has launched five new products from re-platforming work. This will enable RBL to come up with cost-effective and faster product launches. During FY19, the company completed the acquisition of TeePublic and took early advantage of business synergies. 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.  

Redbubble Group is a company with huge potential. In the longer term, the company is prioritising growth in customer base and increased loyalty through personal “creative adventures” and member experiences. The company expects to push out additional products next year 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 hit specific goals.

Over the span of 4 years from FY15 to FY19, the company has witnessed economies of scale because of a disciplined cost base which went down to approximately 25% in FY19 from ~35% in FY15,  and sustainable and ongoing margin improvement from 34% in FY15 to about 37% in FY19. 

FY19 Financial Performance (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)

Significant Improvement in Key Margins: During FY19, the company witnessed a slight year on year improvement in gross margin at 30.8%, up from 29.2% in FY18. This indicates that the company is managing its costs well and is capable of converting its revenue into profits. Over the span of 4 years from FY15 to FY19, the company witnessed a substantial improvement in EBITDA margin. This indicates that the company is gauging its operating expenses and has maintained cost discipline, implying good financial health of the company. In the same time span, Return on Equity also improved, indicating that the company is well deploying the capital of its shareholders. During FY19, Assets/Equity ratio was 1.78x, lower than the previous year ratio of 2.17x. This indicates that the business is financed with a larger proportion of investor funding and a small amount of debt, resulting in a financially stable balance sheet.


Key Margins (Source: Thomson Reuters)

Strong Operating Leverage and Increase in EBITDA: During the quarter ended 30 September 2019, the company’s top-line witnessed a growth of 43% and stood at $70 million. This was driven by strong growth rates from TeePublic and its focus on near-term work, including marketing optimisation, product merchandising and line extensions, and growing member revenue. The company also delivered substantial operating leverage with gross profit growth of 48% as compared to the growth of 22% in expenses. This resulted in gross profit margin to increase by 1.5 percentage points to 37.9%. In the same time span, operating EBITDA of the company was $3.7 million, an increase of $4.5 million from a 1Q FY2019 loss of $0.8 million. RBL is also making strategic progress in long term market growth and profitability as product revenue from artists went up by 20%, representing 83% of Redbubble Product Revenue. 

The company has also announced that it has entered into a new agreement with Mr. Barry Newstead, CEO and Managing Director, which will bring the remuneration of Mr. Newstead in line with the executive remuneration model.


1Q FY20 Financial Summary (Source: Company Reports)

Performance of RBL post the Acquisition of TeePublic: The company generated scale and growth benefits across both platforms- Redbubble Limited and TP Apparel LLC (TeePublic). This presents a new way to engage fans and evolve their merchandise business in partnership with artists and hence, is deepening relationships with customers to enrich the experience. RBL, with the help of TeePublic, generated a lot of inbound organic search and social traffic, which helped the company in keeping its marketing costs low. The company expects to extend TeePublic into new markets and replicate the member experience. For the TeePublic business, several signs of progress have been seen across paid marketing, content partners, supply chain improvements, etc. The diversifying supply chain mitigated network risk and resulted in the realisation of $1.3 million of synergies in FY19. Integration of TeePublic extended the savings of the company and enhanced the artist’s tools and services, enabling easier access to share content across both brands. 

RB Group launches ADR Program: The company has recently announced the launch of its sponsored Level 1 American Depositary Receipts Program and notified that it has received approval from the United States SEC (Securities and Exchange Commission) to establish this program in the United States. The company has appointed The Bank of New York Mellon (BNYM) as the nominated depositary bank. ADR program will enable the qualifying non-US companies to have direct exposure to the US investment community, over-the-counter markets, and positions the company in closer proximity to its US online marketplaces and e-commerce peers. The program will also facilitate existing RBL ordinary shares to be bundled by BNYM.  

What to Expect From RBL: The company is well-positioned for growth as competitors will face an intimidating challenge to reach a similar scale. The company expects long term growth in a large addressable market and is prioritising for growth in customer base. It is also focusing on increasing loyalty through personal “creative adventures” and member experiences. Redbubble Limited expects to maintain healthy growth and synergy value from TeePublic and expects to attract maximum value from marketing channels and maintain operating expenses and cash discipline. The company plans to launch and sell products that artists want to design and is building deeper relationships with authentic artists by increasing their commercial success. It is also targeting to reach a milestone of $1 billion in sales. 

The company expects substantial market opportunities from on-demand technologies which will help the company to leverage huge long-tail content library, delivering personalised, quality and affordable products. RB Group is dedicated to executing across its strategic initiatives and is delivering on prospects to boost the flywheel.  


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: EV/EBITDA Multiple Approach

EV/EBITDA Based Relative Valuation (Source: Thomson Reuters)

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

Stock Recommendation: As per ASX, the stock of RBL gave a return of 7.83% on a YTD basis and a return of 6.36% in the past one month. The stock is also trading close to its 52-weeks’ low level of $0.840, proffering a decent opportunity for accumulation. The company is tapping shift towards personalisation and has a huge addressable market. RBL is giving positive signals and is inspiring artists while witnessing economies of scale. RBL is propelled by a large artist community and has seen a CAGR of 41% in Active artists over the span of 5 years and a CAGR of 39% in unique customers. Considering the returns, trading levels, improvement in key margins, and decent growth opportunities, we have valued the stock using EV/EBITDA based relative valuation approach and have arrived at a target price offering an upside of lower double-digit (in percentage terms). For the said purposes, we have considered Kogan.com Ltd (ASX: KGN), Temple & Webster Group Ltd (ASX: TPW), Mosaic Brands Ltd (ASX: MOZ), etc., as peers. Hence, we recommend a “Buy” rating on the stock at the current market price of $1.125, down by 3.846% on 11 February 2020. 
 
 
RBL Daily Technical Chart (Source: Thomson Reuters)

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