Making music easy

Focusrite 27 April 2016 QuickView

Focusrite

Making music easy

Consumer

QuickView

27 April 2016

Price

161.5p

Market cap

£94m

US$1.46/€1.29/£

Share price graph

Share details

Code

TUNE

Listing

AIM

Shares in issue

58.1m

Business description

Founded in 1989, Focusrite is a global music and audio products group supplying hardware and software products used by professional and amateur musicians. The Focusrite brand makes audio interfaces and other recording products; Novation products allow its customers to make electronic music with synthesisers, etc. Focusrite listed on AIM in December 2014.

Bull

Experienced management team with a proven track record.

Leading brands, key sales partnerships in place.

Profitable, net cash (£4m), dividend payer.

Bear

Changing markets require regular new products.

Competitive markets, shift to digital channels.

Major shareholder (founder) still holds 52%.

Analysts

Jane Anscombe

+44 (0)20 3077 5740

Paul Hickman

+44 (0)20 3681 2501

Focusrite continues to deliver solid growth supplying the changing music content creation market with a steady stream of well-received new products. Interim results showed a 3% increase in adjusted EBITDA (to £4.8m) despite increased marketing, and the board’s confidence is demonstrated in an 8% dividend increase. With the company’s experienced management team and excellent track record, we see potential for Focusrite to augment organic growth with complementary acquisitions at some stage. Yet based on consensus the FY16e EV/EBITDA is only 9.6x.

Clear strategy for growth

A market leader in audio interfaces (used to record music), Focusrite is well diversified by product, price points (hardware typically from $100-2,000+) and geography (160 countries). It believes it has only a 10% share of its addressable market, with plenty of scope to grow through new product innovations (R&D 6-7% of revenue, 19 new products in FY15). Digital channels such as YouTube and social media encourage content creation and Focusrite is tapping into the music opportunity, eg with its Circuit ‘grid’ and Launchpad app (more than four million downloads), which make it very easy to create electronic music.

Interim results and consensus forecasts

Focusrite has grown steadily, with EBITDA up from £1.3m in FY09 to £9.3m in FY15. H116 revenue (£25.9m) was 8.7% up on H115 with double-digit growth in Q216. Adjusted EBIT was flat at £3.7m (higher plc-related costs and marketing), but reported PBT fell to £2.4m (H115: £3.5m) due to FX and £0.5m of legal provisions. Unchanged consensus forecasts suggest that FY16 is something of a profits plateau (forecast EBITDA of £9.4m, up 1%). However, with new product releases weighted to H216, FY17e EBITDA growth of 14% looks very achievable. Higher working capital left end-H116 net cash at £4.0m (£6.2m at end-FY15), but this is expected to increase to £5.5m by end-August 2016.

Valuation: Opportunity to take a closer look

Focusrite shares dipped slightly on the interims, producing a timely opportunity to take a closer look at this interesting music business. If H216 product launches go well, earnings could surprise on the upside. The FY16e EV/EBITDA of 9.6x falls to only 8.4x in FY17e for a group with considerable international growth potential.

Consensus estimates

Year
end

Revenue
(£m)

EBITDA*
(£m)

PBT*
(£m)

EPS*
(dil) (p)

DPS
(p)

P/E
(x)

Yield
(%)

08/14

41.0

8.2

6.5

10.1

N/A

16.0

N/A

08/15

48.0

9.3

7.2

10.5

1.8

15.4

1.1

08/16e

53.5

9.4

6.7

9.4

1.9

17.2

1.2

08/17e

58.8

10.7

7.7

10.6

2.0

15.2

1.2

08/18e

64.3

11.7

8.7

11.7

2.2

13.8

1.4

Source: Bloomberg consensus estimates, Edison Investment Research. Note: *Adjusted.

Disclaimer

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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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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