Redbubble Limited

Company Overview: Redbubble Limited (ASX: RBL) was incorporated in 2006, and it operates through an online marketplace where independent creative designers meet and sell products like apparel, mobile cases, homes decor items, stationery, bags etc. It was listed on ASX on 16 May 2016.

RBL Details

Sustenance of the consumers’ demands acted as an addition towards multiple product categories: The company’s marketplace covers 44 locations and integrates 728,000 artists, 9.5 million customers, which totals a Gross Transactional Value (GTV) of $701 million in FY21.

FY21 Results Highlights:

Despite COVID-19, the company reported noteworthy performance during the year, owing to the geographical coverage, use of the mobile platform and artists activation:

• Due to sustenance of the consumers’ demands throughout the year, especially in the U.S. (67% of the total business - RBL’s largest market), the group managed to increase its total revenue by ~58% Y-o-Y and reported as ~$657.3 million for FY21, where the repeat customers purchase contributed ~42% of total revenue (~67% increase Y-o-Y from FY20), and new customers purchase increased by ~52% Y-o-Y in FY21 (pcp).
• With the growth of ~930% Y-o-Y in its EBITDA, the company converted its net losses of ~$8.77 million in FY20 to net profits of ~$31.24 million in FY21.
• It closed its accounts for FY21 with the cash and cash equivalents as of 31st June 2021 at ~$98.69 million, compared to ~$58.13 million in FY20.

Growth Drivers and Catalysts: RBL is well-positioned for catering its unique artists and addressing its dynamic customers with unique and increasing demands:

• Artists’ Artfield: A total of ~49% Compounded Annual Growth Rate (CAGR) increase from FY17-FY21 and ~54% Y-o-Y came out as 728,000 artists in FY21, who sold ~$104 million on RBL’s marketplace. While, on the other hand, RBL is deepening its investment in retention and getting new artists on board, which have contributed ~$553 million (up by ~58% Y-o-Y) to the Marketplace Revenue as of FY21, earlier was just ~$141 million in FY17.
• Customers’ Demands Satisfaction: Its unique customer base increased at ~35% CAGR from the last past five years and ~40% Y-o-Y in FY21. Besides, improvisation of organic channels for continuous acquisition of new customers’, RBL is quite bullish on spending on google ads, affiliates, PR programs, direct mail, and podcasts.
• Mobile Revenue: A total of ~55% of marketplace revenue comes from its mobile platforms, including ~14% coming from Redbubble Apps, which has increased ~77% Y-o-Y in FY21.

GTV and Revenue Mix by Region Highlights (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 57.09% of the total shareholding, while the top 3 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 has reported an improvement in gross margin performance from FY19 at 30.8% to 33.9% in FY21. Current Ratio also improved on Y-o-Y basis from 0.89x in FY20 to 1.70x in FY21.

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

Recent News:

• Southeastern Asset Management, Inc. and Osmium Partners, LLC became substantial shareholders in December 2021 in RBL with a voting power of ~5.41% and ~6.1%, respectively.
• On 3rd December 2021, RBL was removed from the list of S&P/ASX 200 Index effective from 20^thDecember 2021.

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

1. Fluctuations in Demands and Sentiments: Due to the changes in customers’ preferences and sentiments, RBL is susceptible to the dynamic environment and its everchanging demands. For which it must continuously up-match itself to up-keep its market existence.
2. COVID-19 and Omicron Variant Risks: Due to COVID-19 and the new variant, the company can be impacted by the lockdown regulations, affecting its sales. The RBL business focuses on the mobile marketplace segment and its regular upgradation and enhancement to mitigate the same.
3. Heavy Competition: Though the industry it deals in is quite diverse, it outstands through its unique platform to integrate the customers and artists. But the industry is quite competitive and might be considered a war of survival of the fittest.
4. Technology Risk: The business’s efficiency also depends on the ease of its interface and technology provider to the customers and work with regular upgradation.

Outlook Gauge (CY20-CY24): With the increasing structural shift to eCommerce and increasing demand for unique products, RBL addresses an addressable market of ~+US$300 billion with an expected ~9% p.a. increase in eCommerce spend from 2020 to 2024.

Looking forward to the medium term (CY24+), the company intends to reach ~$1.5 billion GTV with ~$1.25 billion (~20-30% CAGR from CY20-CY24) in marketplace revenue and ~$250 million artists’ revenue, thereby putting a forward foot in growing the product portfolio along with maintaining the gross margin at ~40-42%. With the increase in overall marketing spend and other operating expenses to ~12-15%, it expects to achieve economies of scale and consequently a mid-single-digit EBITDA of ~13-18% of marketplace revenue (MPR). It is anticipated that the MPR is likely to be affected in 1HFY22, and medium-term aspirations will be continued from 2HFY22 with slightly above overall MPR as compared to underlying MPR for FY21.

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 gave a negative return of ~9.27% in the past six months and a negative return of ~45.94% in the past nine months. The stock has been valued using the 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 some discount to its peers’ average multiple, considering the COVID-19 and new variant Omicron headwinds and targeted investments to be made in marketing and OPEX, altogether affecting the gross margins. For the purpose of valuation, few peers like Temple & Webster Group Ltd (ASX: TPW), Kogan.com Ltd (ASX: KGN), Adore Beauty Group Ltd (ASX: ABY) and others have been considered. Considering the expected upside in valuation, current trading levels, targeting the Total Addressable Market (TAM), maintenance of artists and customers’ retention, diversification through products and globalisation, 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 $3.100, 12:00 PM (GMT+10), Sydney, Eastern Australia, (as on 11^th January 2021).

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: -

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

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