Redbubble Limited

Company Overview: Redbubble Limited (ASX: RBL) provides an online marketplace that connects buyers and sellers. It owns and operates Redbubble.com and TeePublic.com. The marketplaces are driven by a community of creative sellers who sells uncommon designs on products such as apparel, housewares, bags, wall art, to name a few.

RBL Details

Unique Business Model Backed by an Increase in Buyers & Sellers: The company is driven by its objective to create a leading marketplace for independent artists. It has witnessed an influx of customers in FY21, which stood at 9.5 million compared to 6.8 million in FY20 and delivered a compound annual growth rate (CAGR) of over 35% through FY17-21.

Strong Operating Model in Place:

• The Group operates a leading Print-On-Demand marketplace for independent artists. It reported an uptick in artists who sold on the platform to 728,000 in FY21, from a level of 472,000 in the prior year. The amount earned by the artists grew by ~58% to ~$104 million in FY21.
• Customer acquisition was driven through organic channels and aided by google ads which contributed to an increasing customer base.
• The company has also reported increased traction in sales from mobile platforms, which contributed over 55% of total marketplace revenue in FY21.

Trading Update:

RBL has recently provided a trading update for its Q1FY22 period and reported an improvement in performance from July to September 2021.

• Marketplace revenue decreased by 28% to $106 million in Q1FY22, compared to the pcp period. Underlying marketplace revenue was down by 6% if the sale of masks were excluded from the business mix.
• The Group reported gross profit at ~$42 million during the period, and EBITDA stood at $3.9 million.
• There was an operating cash inflow of ~$11 million in Q1FY22, compared to ~$27 million in Q1FY21.
• During the quarter, it launched Afterpay for customers in the US, Canada, UK, and Australia. The company also launched 18 new products and line extensions including, baseball caps, desk mats, mouse pads, iPhone 13 cases, to name a few.
• It ended the period with a cash balance of ~$109 million as of 30 September 2021.

Increasing Trend in Revenue (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 52.96% of the total shareholding, while the top 4 constitute the maximum holding. Hosking (Martin) and Kayne Anderson Rudnick Investment Management, LLC are holding a maximum stake in the company at 14.32% and 9.06%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: The company reported an improvement in the margin performance in FY21, with a turnaround in net margin performance from negative 2.1% in FY20 to positive 4.8% in FY21. ROE of the Group stood at an impressive 34.1% in FY21, and the cash cycle was at negative 26.3 days.

Profitability Metrics & Liquidity Profile (Source: Analysis by Kalkine Group)

Key Risks: The company is exposed to the following risk factors:

• Macroeconomic Risk: The Group is prone to macroeconomic risks such as the ongoing COVID-19 pandemic, which might impact the buying behaviour of consumers.
• Litigation Risk: The company is also prone to litigation risks that can arise from the Group's role as an intermediary for user-generated content.
• Demand Risk: The business of the Group is cyclical in nature, and it has reported in Q1FY22 trading update that the revenue growth in H1FY22 would mostly be negative, compared to the prior corresponding period. This was mainly on account of strong sales driven by the COVID-19 induced lockdowns and sale of masks in the prior period.

Outlook: The Group seems to be well-positioned to leverage on the addressable market of over ~US$300 billion, aided by favourable macro trends and structural shift to e-Commerce spending. It has reiterated its revenue outlook and expects FY22 marketplace revenue to be slightly above the underlying revenue in FY21. RBL also expects EBITDA margin to be in the range of mid-single-digit in FY22, with margin expansion anticipated over the medium-term along with top-line growth.

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

Source: 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: As per ASX, the stock of RBL is trading below its 52-weeks’ average levels of $2.620-$7.350. The stock of RBL gave a positive return of ~3.88% in the past six months and a negative return of ~17.25% in the past one month. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at a slight discount to its peers’ average EV/Sales, considering the decrease in marketplace revenue in Q1FY22, cyclical nature of the business, and presence of inherent risks in the sector. For the purpose of valuation, few peers like Kogan.com Ltd (ASX: KGN), Adore Beauty Group Ltd (ASX: ABY), Booktopia Group Ltd (ASX: BKG) have been considered. Considering the expected upside in valuation & current trading levels, resilient business model, rise in cash position, increase in customers & sellers, optimistic long-term outlook and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $3.68, (as on 09 November 2021, 10:34 AM (GMT+10), Sydney, Eastern Australia).

RBL Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions 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 analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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