A warm tone

Focusrite 20 November 2019 Update
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Focusrite

A warm tone

FY19 results

Consumer electricals

20 November 2019

Price

540p

Market cap

£314m

Net cash (£m) at 31 August 2019

14.9

Shares in issue

58.1m

Free float

60%

Code

TUNE

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(2.0)

23.2

29.3

Rel (local)

(4.1)

19.8

22.6

52-week high/low

591p

425p

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

AGM statement

20 December 2019

Analysts

Russell Pointon

+44 (0)20 3077 5757

Neil Shah

+44 (0)20 3077 5715

Focusrite is a research client of Edison Investment Research Limited

Focusrite has delivered strong FY19 results, highlighting improved revenue momentum with a favourable reception of new product releases, better-than-expected margin delivery and encouraging trading on its first major acquisition since IPO, ADAM Audio. We increase our underlying assumptions for FY20 to reflect the improved trading and gross margin benefits from a shift in sourcing, but forex translation (notably strengthening sterling versus the euro) tempers the upgrade to c 4% for FY20. Our DCF-based valuation increases to 618p from 544p.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

08/18

75.1

11.3

17.6

3.3

30.6

0.6

08/19

84.7

13.8

21.4

3.8

25.2

0.7

08/20e

95.6

14.2

21.7

3.9

24.8

0.7

08/21e

99.0

14.4

21.9

4.0

24.7

0.7

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

FY19 results: Solid trends

Following the upbeat trading update in September, FY19 results were ahead of our expectations. Revenue grew by 12.7%, clean PBT by 21.2% and DPS by 15.2%. All geographic regions grew: constant currency revenue growth (ex M&A) of 5.6% improved versus the 0.5% in H119 due to a better H219 in North America (a strong reception for the new Scarlett interface) and rest of world. The gross margin of 42.2% was stable year on year, a good performance given the continuous US tariff increases. To mitigate further US tariff increases, Focusrite will source US production for Scarlett from Malaysia rather than China. By product category, Focusrite was the key driver of growth, whereas Focusrite Pro and Novation were affected by products coming to the end of their lifecyles; relaunches post year-end provide support for a better FY20. The recent acquisition, ADAM Audio, contributed for just six weeks of FY19, but is performing slightly ahead of expectations.

Underlying upgrades for FY20

We have upgraded our underlying FY20 forecasts, reflecting improved underlying trading in the US, and increased gross margin due to the benefit of shift of sourcing to Malaysia. We assume underlying revenue growth of 2–3% in North America and EMEA, and 5% in rest of world for FY20 and FY21. We now assume gross margin increases by 20bp in FY20, versus a 50bp deterioration previously. The weakening euro (current €1.17/£ versus FY19 blended €1.11) is a translational headwind to Focusrite’s euro-based revenue with limited euro-based costs. Our PBT forecast for FY20 increases by c 4% from £13.7m to £14.2m.

Valuation: DCF valuation upgraded by 13%

Our DCF-based valuation increases to 618p from 544p to reflect the upgrades to estimates and rolling forward the DCF. On our new forecasts the EV/EBITDA multiple for FY20 and FY21 are 16.1x and 15.5x respectively.

Exhibit 1: Financial summary

£'k

2017

2018

2019

2020e

2021e

31-August

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

66,055

75,121

84,665

95,645

98,992

Cost of Sales

(39,704)

(43,447)

(48,899)

(55,091)

(56,822)

Gross Profit

26,351

31,674

35,766

40,553

42,171

EBITDA

 

 

13,109

15,485

17,197

18,521

19,257

Operating profit (before amort. and except).

 

 

9,470

11,613

13,549

14,069

14,193

Amortisation of acquired intangibles

0

0

0

0

0

Exceptionals

0

329

(737)

0

0

Share-based payments

0

0

0

0

0

Reported operating profit

9,470

11,942

12,812

14,069

14,193

Net Interest

42

(270)

201

150

200

Joint ventures & associates (post tax)

0

0

0

0

0

Exceptionals

0

0

0

0

0

Profit Before Tax (norm)

 

 

9,512

11,343

13,750

14,219

14,393

Profit Before Tax (reported)

 

 

9,512

11,672

13,013

14,219

14,393

Reported tax

(959)

(1,199)

(1,349)

(1,635)

(1,655)

Profit After Tax (norm)

8,553

10,144

12,401

12,584

12,738

Profit After Tax (reported)

8,553

10,473

11,664

12,584

12,738

Minority interests

0

0

0

0

0

Discontinued operations

0

0

0

0

0

Net income (normalised)

8,553

10,207

12,401

12,584

12,738

Net income (reported)

8,553

10,473

11,664

12,584

12,738

Average number of Shares Outstanding (m)

55.4

56.8

57.7

58.1

58.1

EPS - normalised (p)

 

 

14.8

17.9

20.0

20.8

21.8

EPS - normalised fully diluted (p)

 

 

14.8

17.6

21.4

21.7

21.9

EPS - basic reported (p)

 

 

15.4

18.4

20.2

21.7

21.9

Dividend per share (p)

2.7

3.3

3.8

3.9

4.0

Revenue growth (%)

21.6

13.7

12.7

13.0

3.5

Gross Margin (%)

39.9

42.2

42.2

42.4

42.6

EBITDA Margin (%)

19.8

20.6

20.3

19.4

19.5

Normalised Operating Margin

14.3

15.5

16.0

14.7

14.3

BALANCE SHEET

Fixed Assets

 

 

6,332

7,314

25,705

15,882

17,175

Intangible Assets

4,963

6,039

24,103

14,088

15,256

Tangible Assets

1,369

1,275

1,602

1,794

1,919

Investments & other

0

0

0

0

0

Current Assets

 

 

36,126

47,612

48,875

55,365

64,806

Stocks

9,000

11,391

15,182

16,603

17,903

Debtors

12,952

13,310

18,188

15,722

16,002

Cash & cash equivalents

14,174

22,811

15,505

23,040

30,902

Other

0

100

0

0

0

Current Liabilities

 

 

(8,663)

(11,136)

(16,282)

(13,579)

(13,212)

Creditors

(8,204)

(10,709)

(15,664)

(12,830)

(12,454)

Tax and social security

(459)

(427)

(618)

(749)

(758)

Short term borrowings

0

0

0

0

0

Other

0

0

0

0

0

Long Term Liabilities

 

 

(245)

(300)

(4,284)

(2,006)

(2,271)

Long term borrowings

0

0

0

0

0

Other long term liabilities

(245)

(300)

(4,284)

(2,006)

(2,271)

Net Assets

 

 

33,550

43,490

54,014

55,663

66,497

Minority interests

0

0

0

0

0

Shareholders' equity

 

 

33,550

43,490

54,014

55,663

66,497

CASH FLOW

Op Cash Flow before WC and tax

13,109

15,485

17,197

18,521

19,257

Working capital

407

(426)

(2,313)

(1,790)

(1,954)

Exceptional & other

137

203

(386)

(0)

(0)

Tax

(633)

(478)

(825)

(1,635)

(1,655)

Net operating cash flow

 

 

13,020

14,784

13,673

15,096

15,647

Capex

(3,614)

(4,512)

(4,943)

(5,504)

(5,697)

Acquisitions (net of acquired working capital)

0

0

(14,274)

0

0

Net interest

(42)

(36)

58

150

200

Equity financing

258

306

0

0

0

Dividends

(1,138)

(1,679)

(2,005)

(2,206)

(2,289)

Other

84

(226)

185

0

0

Net Cash Flow

8,568

8,637

(7,306)

7,535

7,861

Opening net debt/(cash)

 

 

(5,606)

(14,174)

(22,811)

(15,505)

(23,040)

FX

0

0

0

0

0

Other non-cash movements

0

0

0

0

0

Closing net debt/(cash)

 

 

(14,174)

(22,811)

(15,505)

(23,040)

(30,901)

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 research department of Edison 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 Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). 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

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

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.

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

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 research department of Edison 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 Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). 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

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

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.

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

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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