Right focus

Focusrite 20 March 2017 Update
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Focusrite

Right focus

Trading update

Consumer electronics

20 March 2017

Price

203p

Market cap

£118m

Net cash (£m) at end February 2017

9.4

Shares in issue

58.1m

Free float

39%

Code

TUNE

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(2.9)

(11.2)

16.7

Rel (local)

(4.5)

(16.3)

(1.7)

52-week high/low

233.5p

138.0p

Business description

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

Next events

Interim results

3 May 2017

Analysts

Paul Hickman

+44 (0)20 3681 2501

Richard Jones

+44 (0)20 3077 5700

Focusrite is a research client of Edison Investment Research Limited

Focusrite has positioned itself in a way that makes its shares a particularly attractive investment: leadership in a niche product area protected from general consumer swings; an international market structure that makes it relatively currency agnostic; a habit of profit over delivery; a strong and further strengthening balance sheet; and an undemanding valuation. This first half trading statement confirms every one of those points.

Year
end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

EV/EBITDA
(x)

Yield
(%)

08/15

48.0

7.2

10.5

1.8

19.3

11.9

0.9

08/16

54.3

7.7

11.8

2.0

17.2

10.9

1.0

08/17e

62.6

8.0

12.1

2.1

16.8

10.1

1.0

08/18e

68.3

8.8

13.3

2.3

15.3

8.9

1.1

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

Niche product area

The second half of 2016 was dominated by the successful launch of the second-generation Scarlett. In addition, in the first half of this financial year there has been notable strength in the Novation Launchpad range across Focusrite’s markets.

International market structure

Continued demand in the US has driven strong sales growth there. The Rest of World region is responding to management focus, and Europe has remained positive.

Profit over-delivery

We are leaving our forecasts unchanged for now in expectation of additional margin and cost detail at the interim results on 3 May. However, we believe the risk to market forecasts is now on the upside.

Strengthening balance sheet

The balance sheet has been debt free since IPO in 2014. Since then cash has strengthened and continues to do so. Cash flow is not heavily seasonal and the February 2017 cash position of £9.4m is well above our August 2017 forecast of £7.5m.

Undemanding valuation

The shares are trading at a 2017 calendar P/E of 16.8x on our existing forecasts, which represents a 14% discount to the peer group and is below our November 2016 DCF valuation of 214p. Given that our forecasts already anticipate double-digit earnings growth in 2017 with further upgrade potential, together with a 1% dividend yield, and that there is cash on the balance sheet of 16p per share that accounts for around one point of P/E, we do not see the shares as expensive.

Strong constant currency first half trading

Focusrite has updated on first half trading in advance of its interim results on 3 May. Revenue is up by 23% at £32m. This includes underlying constant currency growth of 12%, which compares favourably with our assumption of 8% for the full year. The consistently strengthening balance sheet has also become a theme this year, confirmed by the end-February cash balance of £9.4m.

US leads geographical sales

Trading strength has been led by the US, which is Focusrite’s largest market. The Rest of World region has also performed strongly, responding to management focus, with a Hong Kong sales office opened in 2016. The Europe, Middle East and Africa region has also grown despite political uncertainties.

Balance sheet further strengthening

Focusrite has had a strong balance sheet since it came to the AIM market in December 2014. The cash flow does not show significant seasonality and between February 2015 and August 2016, the reported cash balance moved in a range of £4.0-6.2m. In its January 2017 update, the company noted that cash generation was strong in both November and December. This has now been confirmed with a cash balance of £9.4m at the end February, largely as a result of improved working capital, particularly stock control.

Valuation

The shares are trading at a calendar 2017 P/E of 16.8x on our existing forecast, which represents a 14% discount to the peer group we referred to in our November 2016 update. It is also trading below our November 2016 DCF valuation of 214p. Given that our forecasts already anticipate double-digit earnings growth with further upgrade potential, together with a 1% dividend yield, and that there is cash on the balance sheet of 16p per share that accounts for around one point of P/E, we do not see this price level as expensive.


Exhibit 1: Financial summary

£'000s

2015

2016

2017e

2018e

2019e

31 August

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

48,029

54,301

62,600

68,342

73,809

Cost of Sales

(29,381)

(33,439)

(39,448)

(42,604)

(46,012)

Gross Profit

18,648

20,862

23,152

25,738

27,797

EBITDA

 

 

9,302

10,249

10,918

11,953

12,510

Normalised operating profit

 

 

7,024

7,677

8,042

8,815

9,012

Amortisation of acquired intangibles

0

0

0

0

0

Exceptionals

(704)

(537)

0

0

0

Share-based payments

0

0

0

0

0

Reported operating profit

6,320

7,140

8,042

8,815

9,012

Net Interest

164

(14)

0

0

0

Joint ventures & associates (post tax)

0

0

0

0

0

Exceptionals

0

0

0

0

0

Profit Before Tax (norm)

 

 

7,188

7,663

8,042

8,815

9,012

Profit Before Tax (reported)

 

 

6,484

7,126

8,042

8,815

9,012

Reported tax

(1,022)

(870)

(965)

(1,058)

(1,352)

Profit After Tax (norm)

6,166

6,793

7,077

7,757

7,660

Profit After Tax (reported)

5,462

6,256

7,077

7,757

7,660

Minority interests

0

0

0

0

0

Discontinued operations

0

0

0

0

0

Net income (normalised)

6,166

6,900

7,077

7,757

7,660

Net income (reported)

5,462

6,256

7,077

7,757

7,660

Basic average number of shares outstanding (m)

52.4

53.2

54.1

55.1

55.1

EPS - basic normalised (p)

 

 

11.8

13.0

13.1

14.1

13.9

EPS - diluted normalised (p)

 

 

10.5

11.8

12.1

13.3

13.1

EPS - basic reported (p)

 

 

10.4

11.8

13.1

14.1

13.9

Dividend (p)

1.80

1.95

2.10

2.25

2.40

Revenue growth (%)

17.2

13.1

15.3

9.2

0.0

Gross Margin (%)

38.8

38.4

37.0

37.7

37.7

EBITDA Margin (%)

19.4

18.9

17.4

17.5

16.9

Normalised Operating Margin

14.6

14.1

12.8

12.9

12.2

BALANCE SHEET

Fixed Assets

 

 

5,264

6,367

7,597

9,020

10,448

Intangible Assets

3,941

4,792

5,498

6,506

7,534

Tangible Assets

1,323

1,575

2,099

2,513

2,914

Investments & other

0

0

0

0

0

Current Assets

 

 

22,766

28,191

34,472

40,272

45,798

Stocks

8,633

11,361

14,158

15,407

16,640

Debtors

7,737

11,224

12,863

14,230

15,368

Cash & cash equivalents

6,173

5,606

7,451

10,635

13,790

Other

223

0

0

0

0

Current Liabilities

 

 

(8,809)

(9,256)

(10,911)

(11,733)

(12,799)

Creditors

(8,406)

(8,612)

(10,267)

(11,089)

(11,976)

Tax and social security

(403)

(644)

(644)

(644)

(823)

Short term borrowings

0

0

0

0

0

Other

0

0

0

0

0

Long Term Liabilities

 

 

(743)

(282)

(328)

(393)

(459)

Long term borrowings

0

0

0

0

0

Other long term liabilities

(743)

(282)

(328)

(393)

(459)

Net Assets

 

 

18,478

25,020

30,831

37,167

42,989

Minority interests

0

0

0

0

0

Shareholders' equity

 

 

18,478

25,020

30,831

37,167

42,989

CASH FLOW

Op Cash Flow before WC and tax

9,302

10,249

10,918

11,953

12,510

Working capital

(1,689)

(6,009)

(2,781)

(1,795)

(1,484)

Exceptional & other

(591)

(417)

(0)

(0)

(0)

Tax

(838)

(165)

(965)

(1,058)

(1,352)

Net operating cash flow

 

 

6,184

3,658

7,172

9,100

9,674

Capex

(3,559)

(3,675)

(4,191)

(4,677)

(5,173)

Acquisitions/disposals

0

0

0

0

0

Net interest

6

(111)

0

0

0

Equity financing

0

172

0

0

0

Dividends

(314)

(976)

(1,136)

(1,239)

(1,346)

Other

53

365

0

0

0

Net Cash Flow

2,370

(567)

1,845

3,184

3,155

Opening net debt/(cash)

 

 

(3,803)

(6,173)

(5,606)

(7,451)

(10,635)

FX

0

0

0

0

0

Other non-cash movements

0

0

0

0

0

Closing net debt/(cash)

 

 

(6,173)

(5,606)

(7,451)

(10,635)

(13,790)

Source: Edison Investment Research, Focusrite

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 Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 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 Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. 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 2017. “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

245 Park Avenue, 39th Floor

10167, 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

245 Park Avenue, 39th Floor

10167, 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 Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 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 Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. 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 2017. “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

245 Park Avenue, 39th Floor

10167, 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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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