A solid first-half performance

Focusrite 19 March 2019 Update
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Focusrite

A solid first-half performance

Consumer electronics

19 March 2019

Price

524p

Market cap

£305m

Net cash (£m) at 28 February 2019

26.2

Shares in issue

58.1m

Free float

59%

Code

TUNE

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

1.8

14.9

26.9

Rel (local)

0.5

5.2

25.5

52-week high/low

524p

364p

Business description

Focusrite is a global music and audio products group supplying hardware and software used by professional and amateur musicians, which enables the high-quality production of music.

Next events

Interim results

30 April 2019

Trading update

September 2019

Analysts

Kate Heseltine

+44 (0)20 3077 5700

Paul Hickman

+44 (0)20 3681 2501

Focusrite is a research client of Edison Investment Research Limited

Focusrite has reported solid H119 revenue growth, reflecting particularly strong performance in Europe and for its Focusrite ranges globally. We leave forecasts unchanged, recognising the macroeconomic challenges in H2 arising from US tariffs and Brexit. The company is actively seeking opportunities to use its substantial net cash balance (H119: £26.2m), as reflected in the current valuation.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

08/17

66.1

9.5

14.8

2.7

35.4

0.5

08/18

75.1

11.3

17.5

3.3

29.9

0.6

08/19e

78.0

11.8

17.9

3.6

29.3

0.7

08/20e

81.7

12.0

18.0

3.7

29.0

0.7

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Solid sales growth; increase in net cash position

Focusrite has delivered solid H119 revenue growth of c3% to c£40m, with a particularly strong performance in Europe. Sales of the second-generation Scarlett, launched in June 2016 remained robust over the period, offsetting weaker demand for the Novation ranges, most notably Launchpad, which is approaching four years since launch. Cash conversion remained positive and net cash increased by £3.4m to £26.2m at the end of the period. The company continues to invest in the pipeline and has flagged two major new product launches, scheduled for summer and autumn 2019.

No change to our forecasts

Despite delivering a solid H119 trading performance, we cautiously leave our FY19 forecasts unchanged. We recognise the potential macroeconomic challenges in H2, if US tariffs are eventually raised from 10% to 25% (as previously scheduled for 1 March 2019) and from the outcome of Brexit. Focusrite passed on the initial tariff to US customers when introduced last October, with limited impact on demand for most products. However, any further material price increases would be more likely to have a meaningful impact on consumer demand. We modelled sensitivities to both tariffs and Brexit in our November note.

Valuation: Assumes cash utilisation

The share price has appreciated 10% since our last note in December, outperforming the FTSE All Share by c 3%. Then it was broadly equivalent to our DCF, assuming 10% revenue growth for five years beyond our forecast, fading to 2% in perpetuity, with terminal EBITDA margin of 21% and cost of capital of 8.4%. However, it did not reflect the potential return on investment of Focusrite’s excess cash. That has now changed and we calculate the current share price factors in utilisation of that cash, at an attractive long-run post-tax ROCE of c 13%.

H119 pre-close update

Focusrite has reported a solid first-half trading performance, delivering revenue growth of c3% to c£40m, against a record prior year comparative. (In H118, sales rose by 21% to £38.8m, boosted by strong Christmas demand for Launchpad, which was made available on Amazon for the first time. As a result of this, and fewer major product launches in H2, FY18 sales were unusually weighted towards the first half: 51% vs 49%, more typically.)

Across the product ranges, the second-generation Scarlett delivered notably strong sales growth in the first half. Launched in 2016, the second-generation Scarlett has helped the company to win four Queen’s Awards and appeals to musicians wanting to record their work. This strong performance for Scarlett offset weaker demand for Novation, and especially Launchpad, the leading brand within the Novation division (29% of group revenue), which has enjoyed several years of robust demand since launch in mid-2015.

Across the main geographies, Europe saw good growth. In the US, the company’s decision to pass on the 10% import tariff last October did not have any significant impact on demand for its market-leading products, such as Scarlett, although some of its other products were adversely affected.

Profits are reported to have also grown, although the extent to which will not be confirmed until interim results are released on 30 April 2019. We believe that this will have been helped by the prompt increase of prices in the US due to the import tariff increases in October 2018.

Cash generation has remained positive and the net cash balance increased by £3.4m to £26.2m at the end of February. The company has employed a full-time business development officer and is actively looking for acquisition opportunities to invest surplus cash.

Forecasts retained

Despite delivering a solid first half, we cautiously leave our forecasts unchanged. Two major new product launches due in summer and autumn 2019, have been flagged, reflecting the company’s ongoing commitment to product innovation. However, the macroeconomic backdrop for H2 remains challenging, due to the potential impact of Brexit and a possible further increase in US tariffs on goods sourced from China, from 10% (introduced 1 October 2018) to 25%. Although Focusrite’s initial price increase last October to reflect the tariffs did not generally have a significant impact on demand we feel that a further increase in tariff to 25%, if passed on, could have a more meaningful impact on customers. We modelled sensitives to both tariffs and Brexit in our November note.

Exhibit 1: Financial summary

£'000

2016

2017

2018

2019e

2020e

2021e

31-August

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

 

Revenue

 

 

54,301

66,055

75,121

77,985

81,709

85,794

Cost of Sales

(33,439)

(39,704)

(43,447)

(44,722)

(46,786)

(49,039)

Gross Profit

20,862

26,351

31,674

33,264

34,923

36,755

EBITDA

 

 

10,249

13,109

15,485

15,901

16,519

17,292

Operating profit (before amort. and except).

 

7,677

9,470

11,613

11,790

11,972

12,243

Amortisation of acquired intangibles

0

0

0

0

0

0

Exceptionals

(537)

0

329

0

0

0

Share-based payments

0

0

0

0

0

0

Reported operating profit

7,140

9,470

11,942

11,790

11,972

12,243

Net Interest

(14)

42

(270)

20

60

70

Joint ventures & associates (post tax)

0

0

0

0

0

0

Exceptionals

0

0

0

0

0

0

Profit Before Tax (norm)

 

 

7,663

9,512

11,343

11,810

12,032

12,313

Profit Before Tax (reported)

 

 

7,126

9,512

11,672

11,810

12,032

12,313

Reported tax

(870)

(959)

(1,199)

(1,417)

(1,444)

(1,478)

Profit After Tax (norm)

6,793

8,553

10,144

10,393

10,588

10,836

Profit After Tax (reported)

6,256

8,553

10,473

10,393

10,588

10,836

Minority interests

0

0

0

0

0

0

Discontinued operations

0

0

0

0

0

0

Net income (normalised)

6,900

8,553

10,144

10,393

10,588

10,836

Net income (reported)

6,256

8,553

10,473

10,393

10,588

10,836

Average number of Shares Outstanding (m)

53.2

55.4

56.8

56.8

56.8

56.8

EPS - normalised (p)

 

 

13.0

14.8

17.5

17.9

18.0

21.0

EPS - normalised (p)

 

 

11.8

14.8

17.5

17.9

18.0

18.6

EPS - basic reported (p)

 

 

11.8

15.4

18.4

18.3

18.6

19.1

Dividend per share (p)

2.0

2.7

3.3

3.6

3.7

3.9

Revenue growth (%)

13.1

21.6

13.7

3.8

4.8

5.0

Gross Margin (%)

38.4

39.9

42.2

42.7

42.7

42.8

EBITDA Margin (%)

18.9

19.8

20.6

20.4

20.2

20.2

Normalised Operating Margin

14.1

14.3

15.5

15.1

14.7

14.3

BALANCE SHEET

Fixed Assets

 

 

6,367

6,332

7,314

8,653

9,845

10,822

Intangible Assets

4,792

4,963

6,039

7,559

8,884

10,074

Tangible Assets

1,575

1,369

1,275

1,094

961

749

Investments & other

0

0

0

0

0

0

Current Assets

 

 

28,191

36,126

47,612

54,270

61,460

68,674

Stocks

11,361

9,000

11,391

11,995

12,548

13,287

Debtors

11,224

12,952

13,310

14,288

14,970

15,953

Cash & cash equivalents

5,606

14,174

22,811

27,886

33,838

39,328

Other

0

0

100

102

104

106

Current Liabilities

 

 

(9,256)

(8,663)

(11,136)

(11,258)

(11,764)

(12,184)

Creditors

(8,612)

(8,204)

(10,709)

(10,754)

(11,250)

(11,657)

Tax and social security

(644)

(459)

(427)

(505)

(514)

(526)

Short term borrowings

0

0

0

0

0

0

Other

0

0

0

0

0

0

Long Term Liabilities

 

 

(282)

(245)

(300)

(381)

(452)

(515)

Long term borrowings

0

0

0

0

0

0

Other long term liabilities

(282)

(245)

(300)

(381)

(452)

(515)

Net Assets

 

 

25,020

33,550

43,490

51,283

59,089

66,797

Minority interests

0

0

0

0

0

0

Shareholders' equity

 

 

25,020

33,550

43,490

51,283

59,089

66,797

CASH FLOW

Op Cash Flow before WC and tax

10,249

13,109

15,485

15,901

16,519

17,292

Working capital

(6,009)

407

(427)

(1,537)

(739)

(1,315)

Exceptional & other

(417)

137

203

(0)

(0)

(0)

Tax

(165)

(633)

(478)

(1,417)

(1,444)

(1,478)

Net operating cash flow

 

 

3,658

13,020

14,783

12,947

14,335

14,500

Capex

(3,675)

(3,614)

(4,507)

(5,850)

(6,293)

(6,814)

Acquisitions/disposals

0

0

0

0

0

0

Net interest

(111)

(42)

(36)

20

60

70

Equity financing

172

258

306

0

0

0

Dividends

(976)

(1,138)

(1,679)

(2,042)

(2,150)

(2,266)

Other

365

84

(230)

0

0

0

Net Cash Flow

(567)

8,568

8,637

5,075

5,952

5,490

Opening net debt/(cash)

 

 

(6,173)

(5,606)

(14,174)

(22,811)

(27,886)

(33,838)

FX

0

0

0

0

0

0

Other non-cash movements

0

0

0

0

0

0

Closing net debt/(cash)

 

 

(5,606)

(14,174)

(22,811)

(27,886)

(33,838)

(39,328)

Source: Company accounts, Edison Investment Research

General disclaimer and copyright

This report has been commissioned by Focusrite and prepared and issued by Edison, in consideration of a fee payable by Focusrite. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

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This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

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The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Focusrite and prepared and issued by Edison, in consideration of a fee payable by Focusrite. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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