Positive trading update to November

Focusrite 21 December 2018 Update
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Focusrite

Positive trading update to November

AGM & trading update

Consumer electronics

21 December 2018

Price

475p

Market cap

£276m

Net cash (£m) at 31 August 2018

22.8

Shares in issue

58.1m

Free float

59%

Code

TUNE

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

9.3

9.3

47.7

Rel (local)

13.4

21.4

66.6

52-week high/low

504p

320p

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

Trading update

March 2019

Analysts

Paul Hickman

+44 (0)20 3681 2501

Kate Heseltine

+44 (0)20 3077 5700

Focusrite is a research client of Edison Investment Research Limited

Focusrite reports a strong November, leaving its Q1 ahead year-on-year, a positive result compared with many retailers. While its wide international spread is helpful, uncertainties remain on consumer markets generally, on US tariffs and on Brexit. We retain a cautious forecasting stance, while the valuation reflects the ongoing potential of its market-leading brands.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

EV/EBITDA
(x)

Yield
(%)

08/17

66.1

9.5

14.8

2.7

32.1

20.0

0.6

08/18

75.1

11.3

17.5

3.3

27.1

16.9

0.7

08/19e

78.0

11.8

17.9

3.6

26.6

16.5

0.7

08/20e

81.7

12.0

18.0

3.7

26.3

15.3

0.8

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

A small…

With its December AGM, Focusrite updates on trading to November, which is only a month beyond the comment in the final results. We published an extended note, The song remains the same, in November 2018.

…but significant update

Trading was strong in the important month of November, having been ‘broadly similar’ in September and October. As a result, the first quarter ends ahead of Q118. The November result is significant because Q118 was itself a strong quarter driven by a boost in pre-Christmas demand.

Maintaining modest growth forecast

While positive progress for Q1 is encouraging, the consumer environment clearly remains uncertain, especially in Europe. In our November note, we considered the sensitivity of results to US tariffs on goods sourced in China, along with our forecast assumptions. While there have been indications that the trade dispute is moving towards a negotiation phase, the disposition remains uncertain and currently the US still plans to increase the relevant import tariffs from 10% to 25%. We also set out the (lower-level) sensitivities to a no-deal Brexit, which clearly remain. For all these reasons, we make no change to our forecast of modest 4% PBT growth for FY19.

Valuation: Does not reflect cash utilisation

The current share price is broadly equivalent to the DCF, as set out in our November note. This assumes 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%. That excludes investment returns on Focusrite’s excess cash of £22.8m (at August 2018), which at a P/E of 20x would represent 39p of additional value, we calculate.

Exhibit 1: Financial summary

£'000s

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 2018 Edison Investment Research Limited (Edison). All rights reserved 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.

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

295 Madison Avenue, 18th Floor

10017, New York

US

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

295 Madison Avenue, 18th Floor

10017, New York

US

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 2018 Edison Investment Research Limited (Edison). All rights reserved 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.

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

295 Madison Avenue, 18th Floor

10017, New York

US

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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