Ann: Investor Update - Half Year Report & Accounts, page-6

interesting finding: We have 10m of EBITDA vs 41m operating cashflow and 36m FCF, super strong performance and cheap valuation in terms of CF. i wonder whats in the middle of EBITDA and Operating CF.

@alfred137

The reported 36.0m$ in “Free Cash Flow” is not really a reflection of surplus capital generation, because it doesn’t factor in the corresponding increase in Payables (from 26.5m$ as of June 2019 to 56.8m$ as of December 2019).

As @Vet14 correctly pointed out above (and as Management also re-iterated during yesterday’s earnings call), the payments to Artists and Fulfillers relative to customer purchases occurred in December (which is seasonally the strongest month) are only processed in January, while Redbubble receives the cash from customers at the time of purchase. This is what creates the temporary build-up in cash, which is then wound down over the following quarter.

To get a better sense of how much actual surplus capital was generated over the six-month period to December 2019, one can look instead at the change in Net Current Asset Value (NCAV), i.e. in [Total Current Assets]-[Total Liabilities].

Ignoring the lease-related items introduced by the adoption of AASB16, NCAV amounted to 73.7m$-79.8m$ = -6.1m$ as of December 2019, via-a-vis 36.4m$-47.1m$ = -10.7m$ as of June 2019; therefore, there was a positive change in NCAV by -6.1m$-(-10.7m$) = +4.6m$.

Thus, some surplus capital was indeed generated, but nothing like the reported 36.0m$ figure.

If one then adds back to that 4.6m$ the 4.3m$ in net payments for PP&E and Intangibles, and divides by the reported 10.1m$ EBITDA, the resulting (4.6m$+4.3m$)/10.1m$ = 88.1% can be viewed as a proxy for the EBITDA cash conversion rate. Nothing to worry about on that front, as far as I can see.

What I personally had a bit of a problem with, in yesterday’s announcement, was the way revenue growth figures were presented; for, if one looks at comparable periods of time, the implied growth rates are nowhere near the +26.0% pa (on a floating basis) and 21.0% pa (on a constant-currency basis) reported in the presentation.

Let’s start from the 47.0m$ Marketplace Revenue generated by TeePublic in H1 2020. According to slide 4 of the presentation, that represented a +55.0% growth on a Constant-Currency (CC) basis vis-a-vis H1 2019; therefore, the revenue base over the previous corresponding period (inclusive of the four months when TeePublic was not owned by Redbubble) was 47.0m$/(1+55.0%) = 30.3m$.

By saying that CC growth was by +210.0% “based on ownership from 01 Nov 2018”, Management are merely specifying that 47.0m$/(1+210.0%) = 15.2m$ of that 30.3m$ was earned during the last two months of 2018.

But, if Redbubble’s H1 2019 Marketplace Revenue base was 133.0m$/(1-1.0%) = 134.3m$ (as implied by a -1.0% decline on a CC basis), and TeePublic’s was 30.3m$ (as calculated above), then the overall CC growth in Marketplace Revenue was only by (133.0m$+47.0m$)/(134.3m$+30.3m$)-1 = +9.3%, which is a lot lower than +21.0%.

Adding in the impact of currency gives me a comparable revenue base of 159.4m$ for H1 2019 (assuming TeePublic was owned for the whole six-month period), therefore the overall revenue growth on a floating basis was by 180.0m$/159.4m$-1 = +12.9% (which, again, is a lot lower than +26.0%).

At any rate, the fact that Redbubble’s Marketplace revenue (ex-TeePublic) had been flattish over the previous corresponding period had already been flagged to the Market on December 12th, and the Market had already duly “factored that in” with a -42.5% drop in the SP.

So, having now a better sense of what the underlying revenue growth is, what remains to be done from a prospective investor’s point of view is to check whether the Company’s current Market Cap is an appropriate reflection of that growth rate, and of the absolute level of Revenue and Gross Profit generation.

First of all, given the inherent seasonality of the business, I see it more sensible to look at the current trailing-twelve-month (TTM) levels of Marketplace Revenue and Gross Profit, as opposed to just annualising the latest corresponding half-year figures. That gives me a TTM Marketplace Revenue of 294.0m$ and a TTM Gross Profit of 108.5m$ (corresponding to a 36.9% Gross Margin). Therefore, at its current Market Cap of 258.8m*1.010$ = 261.4m$, RBL is being valued by the Market at ~0.9x its TTM Marketplace Revenue and at ~2.4x its TTM Gross Profit.

Importantly, Redbubble spend ~30% of their Gross Profit (31.6m$ on a TTM basis) in Marketing (the so-called “Paid Acquisition Costs”); that spend is clearly not aimed at achieving only a ~10% pa revenue growth rate, but probably something more akin to the ~55% pa that TeePublic is currently experiencing, or (at least) to the ~23% organic revenue CAGR (ex-TeePublic) achieved by Redbubble over the past three years.

I suspect that, if Management suddenly decided that they are content with growing at just 10% pa, they could easily cut 2/3 of that Marketing effort; and that, without any further changes to the cost structure, would be enough to lift Operating EBITDA from its current TTM level of 7m$ to something like 28m$ pa. So, the Company is currently trading at just ~9.3x that “underlying” level of potential EBITDA generation, which is a sub-market multiple relative to the current ~10.0x (on a pre-AASB16 basis) the ASX200 is trading at.

The way I personally read this is that, while Redbubble’s growth trajectory is currently encountering some difficulties, the market is already pricing the stock as if average (or even sub-par) growth were a certainty for the foreseeable future.

So, while this is not the kind of business I would ever allocate a significant portion of capital to (not at this stage of its corporate evolution, at least), I do see some value in it at present, in the form of virtually free growth optionality. Accordingly, I have started buying the shares today, aiming at a ~1% initial portfolio allocation.

Hope this helps. As always, my two cents only, and all the usual caveats apply.

Cheers