Music therapy

Focusrite 10 January 2018 Update (1-4pgs)
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Focusrite

Music therapy

January trading statement

Consumer electronics

10 January 2018

Price

341p

Market cap

£198m

Net cash (£m) at August 2017

14.2

Shares in issue

58.1m

Free float

58%

Code

TUNE

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

7.4

23.3

63.6

Rel (local)

2.7

19.6

51.2

52-week high/low

341.0p

201.5p

Business description

Focusrite is a global music and audio products group that develops and markets hardware and software products, used by both audio professionals and amateurs to realise the high-quality production of recorded and live sound.

Next events

Interim results

April 2018

Analysts

Paul Hickman

+44 (0)20 3681 2501

Neil Shah

+44 (0)20 3077 5715

Focusrite is a research client of Edison Investment Research Limited

Growth in revenue and cash is strong after four months of trading. Focusrite continues to build on its leadership positions in international markets, and to benefit from its c 85% non-UK market exposure. Further growth in cash is also encouraging as it suggests good profit conversion despite expected cost increases. If these independent growth trends continue to the half-year, we would see upside risk to our forecasts.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

EV/
EBITDA (x)

Yield
(%)

08/16

54.3

7.7

11.8

2.0

28.9

18.8

0.6

08/17

66.1

9.5

14.8

2.7

23.0

14.0

0.8

08/18e

72.7

10.0

15.3

3.0

22.2

13.3

0.9

08/19e

78.6

10.6

15.9

3.3

21.4

12.4

1.0

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

Growth continues strongly

In November management reported that revenue and cash had grown “further” since the August year end, with “strong” market acceptance of the expanding portfolio. Now, the growth itself is described as “strong”, and it has moreover continued through November and December. The word ‘strong’ (which was also used about FY17’s constant currency growth of 13%) indicates a firming position, as well as the fact that the four months to December are a more significant period.

Building on international market position

Focusrite derives c 85% of revenue from non-UK sources, positioning it well in structurally sound international markets such as the US and Far East. We understand that trends seen in FY17 have broadly continued. Those were, firstly, growth in all geographies, but led by the US and Rest of World (mainly Asia), and secondly growth in both divisions, led by Novation. Focusrite continues to build its leading international positions in its specialised markets of audio interfaces and sound generation.

We retain our forecast with confidence

Revenue growth comparable with FY17’s constant currency growth of 13.5% would be above our FY18 revenue forecast of 10% (constant currency: 8%). We already forecast cost increases on the two new brand groups Focusrite Pro and Ampify (see our Outlook note), as well as in e-commerce. However, strong growth in cash also suggests good profit conversion despite higher costs. We therefore retain added confidence in our forecast, with upside risk if these trends continue to the half year.

Valuation: Does not reflect forecast upside

As we are not changing our forecast, we retain our DCF valuation of 363p/share for now. This would put the shares on an FY18e P/E of 23.7x and EV/EBITDA of 14.2x. We include in our valuation year-end cash of £14.2m reported at the August year end, although cash is also reported as having grown strongly. The use of that cash could also be supportive of the valuation.

Exhibit 1: Financial summary

£'000s

2015

2016

2017

2018e

2019e

2020e

31-August

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

48,029

54,301

66,055

72,715

78,564

84,850

Cost of Sales

(29,381)

(33,439)

(39,704)

(42,460)

(45,876)

(49,546)

Gross Profit

18,648

20,862

26,351

30,254

32,688

35,303

EBITDA

 

 

9,302

10,249

13,109

13,834

14,790

15,634

Operating profit (before amort. and except).

 

7,024

7,677

9,470

9,963

10,515

11,037

Amortisation of acquired intangibles

0

0

0

0

0

0

Exceptionals

(704)

(537)

0

0

0

0

Share-based payments

0

0

0

0

0

0

Reported operating profit

6,320

7,140

9,470

9,963

10,515

11,037

Net Interest

164

(14)

42

40

45

50

Joint ventures & associates (post tax)

0

0

0

0

0

0

Exceptionals

0

0

0

0

0

0

Profit Before Tax (norm)

 

 

7,188

7,663

9,512

10,003

10,560

11,087

Profit Before Tax (reported)

 

 

6,484

7,126

9,512

10,003

10,560

11,087

Reported tax

(1,022)

(870)

(959)

(1,200)

(1,426)

(1,663)

Profit After Tax (norm)

6,166

6,793

8,553

8,803

9,135

9,424

Profit After Tax (reported)

5,462

6,256

8,553

8,803

9,135

9,424

Minority interests

0

0

0

0

0

0

Discontinued operations

0

0

0

0

0

0

Net income (normalised)

6,166

6,900

8,553

8,803

9,135

9,424

Net income (reported)

5,462

6,256

8,553

8,803

9,135

9,424

Basic average number of shares outstanding (m)

52.4

53.2

55.4

56.0

56.0

56.0

EPS - basic normalised (p)

 

 

11.8

13.0

15.4

15.7

16.3

16.8

EPS - normalised (p)

 

 

10.5

11.8

14.8

15.3

15.9

16.4

EPS - basic reported (p)

 

 

10.4

11.8

15.4

15.7

16.3

16.8

Dividend per share (p)

1.80

1.95

2.70

2.95

3.30

3.65

Revenue growth (%)

17.2

13.1

21.6

10.1

8.0

8.0

Gross Margin (%)

38.8

38.4

39.9

41.6

41.6

41.6

EBITDA Margin (%)

19.4

18.9

19.8

19.0

18.8

18.4

Normalised Operating Margin

14.6

14.1

14.3

13.7

13.4

13.0

BALANCE SHEET

Fixed Assets

 

 

5,264

6,367

6,332

7,392

8,416

9,544

Intangible Assets

3,941

4,792

4,963

6,159

7,367

8,651

Tangible Assets

1,323

1,575

1,369

1,233

1,050

893

Investments & other

0

0

0

0

0

0

Current Assets

 

 

22,766

28,191

36,126

41,974

48,775

55,221

Stocks

8,633

11,361

9,000

9,888

12,569

13,574

Debtors

7,737

11,224

12,952

14,457

15,620

17,335

Cash & cash equivalents

6,173

5,606

14,174

17,629

20,586

24,312

Other

223

0

0

0

0

0

Current Liabilities

 

 

(8,809)

(9,256)

(8,663)

(9,116)

(9,899)

(10,466)

Creditors

(8,406)

(8,612)

(8,204)

(8,657)

(9,354)

(9,830)

Tax and social security

(403)

(644)

(459)

(459)

(545)

(636)

Short term borrowings

0

0

0

0

0

0

Other

0

0

0

0

0

0

Long Term Liabilities

 

 

(743)

(282)

(245)

(309)

(375)

(444)

Long term borrowings

0

0

0

0

0

0

Other long term liabilities

(743)

(282)

(245)

(309)

(375)

(444)

Net Assets

 

 

18,478

25,020

33,550

39,940

46,918

53,855

Minority interests

0

0

0

0

0

0

Shareholders' equity

 

 

18,478

25,020

33,550

39,940

46,918

53,855

CASH FLOW

Op Cash Flow before WC and tax

9,302

10,249

13,109

13,834

14,790

15,634

Working capital

(1,689)

(6,009)

407

(2,606)

(3,147)

(2,243)

Exceptional & other

(591)

(417)

137

(0)

(0)

(0)

Tax

(838)

(165)

(633)

(1,200)

(1,426)

(1,663)

Net operating cash flow

 

 

6,184

3,658

13,020

10,028

10,217

11,727

Capex

(3,559)

(3,675)

(3,614)

(4,960)

(5,423)

(5,934)

Acquisitions/disposals

0

0

0

0

0

0

Net interest

6

(111)

(42)

40

45

50

Equity financing

0

172

258

0

0

0

Dividends

(314)

(976)

(1,138)

(1,653)

(1,882)

(2,118)

Other

53

365

84

0

0

0

Net Cash Flow

2,370

(567)

8,568

3,455

2,957

3,725

Opening net debt/(cash)

 

 

(3,803)

(6,173)

(5,606)

(14,174)

(17,629)

(20,586)

FX

0

0

0

0

0

0

Other non-cash movements

0

0

0

0

0

0

Closing net debt/(cash)

 

 

(6,173)

(5,606)

(14,174)

(17,629)

(20,586)

(24,312)

Source: Company accounts, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Focusrite and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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.
Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “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.

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, 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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Focusrite and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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.
Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “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.

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, 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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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