Stocks’ Details

Redbubble Limited

QTD Trading Update:Redbubble Limited (ASX: RBL) operates the online marketplaces through its websites Redbubble.com and TeePublic.com. On December 12, 2019, the company announced a trading update for the quarter to date (QTD) from October 1, 2019 to December 9, 2019. Group’s marketplace revenue growth for the second quarter to date has been estimated at 20% (Y-o-Y) on a floating basis. QTD marketplace revenue growth for TeePublic branded and Redbubble branded are estimated to come in at 59% and 2% on Y-o-Y basis. The apparel sales did not recover to its historical growth levels, similar to October 2018. This below than expected result can be attributed to the increased price competition in RBL’s market-leading sticker position.

In another update, company’s substantial holder, Osmium Partners, LLC, reduced its stake in the company from 7.9% to 6.7%, effective from November 26, 2019.

Q1FY20 Financial Highlights for the period ended September 30, 2019:Group’s Marketplace Revenue increased by 43% to $70 Mn on the previous corresponding period (pcp). Gross profit for the period increased by 48% to $27 Mn on pcp. Cash balance at the end of the quarter was reported at $37.9 Mn.


Q1FY20 Key Metrics (Source: Company Reports)

What to Expect:The group is determined to drive the top-line growth by focusing on accelerating near-term work, including marketing optimization, product merchandising and line extensions and growing member revenue. The Group is still expecting to grow Operating EBITDA (Y-o-Y) and achieve positive free cash flows in FY20.

Valuation Methodology:Price to Cash Flow Multiple Approach

Price to Cash Flow Multiple Approach (Source: Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, *NTM-Next Twelve Months

Stock Recommendation:RBL’s share generated a positive YTD return of 98.90%. Its gross margin for FY19 stood at 30.8%, better than the FY18 result of 29.2%. Considering the company’s business model, Q1FY20 financial performance, FY20 guidance and current trading levels, we have valued the stock using a relative valuation method, i.e., Price to Cash Flow multiple and arrived at a lower double-digit growth (in %). Hence, we recommend a “Hold” rating on the stock at the current market price of $1.015, down 43.923% on December 12, 2019 on account of below than market expectation QTD results.

3P Learning Limited
Group’s Licence Revenue Improved by 1%:3P Learning Limited (ASX: 3PL) is involved in developing, sales and marketing of online educational programs to schools and parents of school-aged students. Recently, company’s director Rebekah O’Flaherty acquired 509,175 performance rights, effective from November 22, 2019, taking the final holdings to 112,000 FPOS (held directly), 6,089,906 Options (held directly) with various exercise prices and expiry periods and 509,175 Performance Rights (held directly).

FY19 Financial Highlights for the period ended June 30, 2019:Group’s licence revenue increased by 1% to $51.1 Mn, where revenue from APAC (Asia-Pacific Countries) and Americas grew by 3% and 7%, respectively. The licence revenue was little impacted by a 2% decrease in revenue from EMEA (Europe, the Middle East and Africa) and a 2% decline in other income. Underlying core NPAT (net profit after tax) decreased by 17% to $5.9 Mn, following the increased amortization expense. Cash balance at the end of the period was reported at $25.8 Mn, with no debt.
 
 

FY19 Income Statement (Source: Company Reports)

What to Expect:As per the release, the company’s 2017-2019 strategic plan is completed and is expected to profitably scale the business in a multi-product environment across a diverse global market. Under regional outlook for FY20, decent growth is expected from the improved retention and expanded product portfolio across its large installed base in the APAC region. In the EMEA region, despite tough marketing conditions, growth is expected due to improved retention, expanded product portfolio across its installed base and outside the UK. Accelerated profitable sales growth is expected in the Americas region.

Stock Recommendation:3PL’s share posted a negative YTD return of 27.20%, and the stock is trading close to its 52-week low of $0.810. Its EBITDA margin for FY19 stood at 32.9%, better than the industry median of 38.3%. Its ROE for FY19 stood at 27.1%, better than the industry median of 16.4%. Company’s strong balance sheet with decent cash balance and debt-free status are expected to support 3PL’s growth strategy in leveraging its expanded product portfolio, customer base, improved retention from product enhancements and customer experience to deliver value for its shareholders. On valuation front, its EV/Sales and EV/EBITDA multiples on TTM basis stand at 1.7x and 5.4x, lower than the industry median of 2.1x and 11.2x, respectively, indicating an undervalued position at the current juncture. Considering the above-mentioned facts,we recommend a “Speculative Buy” rating on the stock at the current market price of $0.870 on December 12, 2019.
 

5G Networks Limited

5GN Wins “CRN Fast50” Award:5G Networks Limited (ASX: 5GN) is involved in the supply of cloud-based solutions, managed services and network services. It operates its own fibre and wireless infrastructure and manages its own cloud computing environment. It also operates its own data centres following the acquisition of Melbourne data centre.

Recently, the company received a recognition by clinching the fastest growing IT Services Award “CRN Fast50”at the Sofitel Wentworth, Sydney NSW.On the same occasion, the company launched the new Indirect Sales Channel with the appointment of Nigel Burke as the National Channel Manager. Mr. Burke would be leading the new indirect sales and partner channel for 5G networks across the country to grow new revenue streams.
Key Highlights of September’19 Quarter:Underlying business cashflow for the period was reported at $1.62 Mn before acquisition costs of $260k. Capital expenditure for the period was reported at $496k, mainly due to customer demand and finalisation of the Melbourne fibre rollout. Cash balance at the end of the period was reported at $3.067 Mn, with the available debt facility of $2.4 Mn giving the business a funding capacity to transact on future acquisitions.


September Quarter Operating Cash Flow Statement (Source: Company Reports)

What to Expect:The company is now targeting hosting providers and network operators for the next stage. It has successfully completed the Sydney Data Centre Acquisition in Pyrmont (APDC) and with this, a synergy is expected to be achieved and recognised over the next six months.

Stock Recommendation:The stock has corrected 17.86% in the last three months and currently moved below the average of 52-week high and low level of $1.715 and $0.380, respectively. Its current ratio for FY19 stood at 1.12x, better than the industry median of 0.78x, which implies that the company is in a better position to address its short-term obligations. Company’s recent win of CRN award has encouraged its Management and staff morale across 12 locations in Australia, for their work for last 2 years in making the business a success. On valuation front, its EV/Sales multiple on TTM basis stands at 1.2x, lower than the industry median of 2.6x, indicating an undervalued position at the current juncture. Hence, considering the aforesaid facts and current trading levels, we recommend a “Speculative Buy” rating on the stock at the current market price of $0.690 on December 12, 2019. 
 
 
Comparative Price Chart (Source: Thomson Reuters)

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