Focusrite has reported solid H119 revenue growth, reflecting particularly strong performance in Europe and for its Focusrite ranges globally. We leave forecasts unchanged, recognising the macroeconomic challenges in H2 arising from US tariffs and Brexit. The company is actively seeking opportunities to use its substantial net cash balance (H119: £26.2m), as reflected in the current valuation.
Written by
Focusrite |
A solid first-half performance |
Consumer electronics |
19 March 2019 |
Share price performance
Business description
Next events
Analysts
Focusrite is a research client of Edison Investment Research Limited |
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Focusrite has reported solid H119 revenue growth, reflecting particularly strong performance in Europe and for its Focusrite ranges globally. We leave forecasts unchanged, recognising the macroeconomic challenges in H2 arising from US tariffs and Brexit. The company is actively seeking opportunities to use its substantial net cash balance (H119: £26.2m), as reflected in the current valuation.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
08/17 |
66.1 |
9.5 |
14.8 |
2.7 |
35.4 |
0.5 |
08/18 |
75.1 |
11.3 |
17.5 |
3.3 |
29.9 |
0.6 |
08/19e |
78.0 |
11.8 |
17.9 |
3.6 |
29.3 |
0.7 |
08/20e |
81.7 |
12.0 |
18.0 |
3.7 |
29.0 |
0.7 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Solid sales growth; increase in net cash position
Focusrite has delivered solid H119 revenue growth of c3% to c£40m, with a particularly strong performance in Europe. Sales of the second-generation Scarlett, launched in June 2016 remained robust over the period, offsetting weaker demand for the Novation ranges, most notably Launchpad, which is approaching four years since launch. Cash conversion remained positive and net cash increased by £3.4m to £26.2m at the end of the period. The company continues to invest in the pipeline and has flagged two major new product launches, scheduled for summer and autumn 2019.
No change to our forecasts
Despite delivering a solid H119 trading performance, we cautiously leave our FY19 forecasts unchanged. We recognise the potential macroeconomic challenges in H2, if US tariffs are eventually raised from 10% to 25% (as previously scheduled for 1 March 2019) and from the outcome of Brexit. Focusrite passed on the initial tariff to US customers when introduced last October, with limited impact on demand for most products. However, any further material price increases would be more likely to have a meaningful impact on consumer demand. We modelled sensitivities to both tariffs and Brexit in our November note.
Valuation: Assumes cash utilisation
The share price has appreciated 10% since our last note in December, outperforming the FTSE All Share by c 3%. Then it was broadly equivalent to our DCF, assuming 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%. However, it did not reflect the potential return on investment of Focusrite’s excess cash. That has now changed and we calculate the current share price factors in utilisation of that cash, at an attractive long-run post-tax ROCE of c 13%.
H119 pre-close update
Focusrite has reported a solid first-half trading performance, delivering revenue growth of c3% to c£40m, against a record prior year comparative. (In H118, sales rose by 21% to £38.8m, boosted by strong Christmas demand for Launchpad, which was made available on Amazon for the first time. As a result of this, and fewer major product launches in H2, FY18 sales were unusually weighted towards the first half: 51% vs 49%, more typically.)
Across the product ranges, the second-generation Scarlett delivered notably strong sales growth in the first half. Launched in 2016, the second-generation Scarlett has helped the company to win four Queen’s Awards and appeals to musicians wanting to record their work. This strong performance for Scarlett offset weaker demand for Novation, and especially Launchpad, the leading brand within the Novation division (29% of group revenue), which has enjoyed several years of robust demand since launch in mid-2015.
Across the main geographies, Europe saw good growth. In the US, the company’s decision to pass on the 10% import tariff last October did not have any significant impact on demand for its market-leading products, such as Scarlett, although some of its other products were adversely affected.
Profits are reported to have also grown, although the extent to which will not be confirmed until interim results are released on 30 April 2019. We believe that this will have been helped by the prompt increase of prices in the US due to the import tariff increases in October 2018.
Cash generation has remained positive and the net cash balance increased by £3.4m to £26.2m at the end of February. The company has employed a full-time business development officer and is actively looking for acquisition opportunities to invest surplus cash.
Forecasts retained
Despite delivering a solid first half, we cautiously leave our forecasts unchanged. Two major new product launches due in summer and autumn 2019, have been flagged, reflecting the company’s ongoing commitment to product innovation. However, the macroeconomic backdrop for H2 remains challenging, due to the potential impact of Brexit and a possible further increase in US tariffs on goods sourced from China, from 10% (introduced 1 October 2018) to 25%. Although Focusrite’s initial price increase last October to reflect the tariffs did not generally have a significant impact on demand we feel that a further increase in tariff to 25%, if passed on, could have a more meaningful impact on customers. We modelled sensitives to both tariffs and Brexit in our November note.
Exhibit 1: Financial summary
£'000 |
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
|
|
Research: Financials
DeA Capital performed well in FY18 despite turbulent financial markets, developing its alternative asset management platform and growing AUM. Minority interests have been eliminated and net asset value grew. Strong cash flow continues, driven by net distributions from maturing fund investments, sufficient to fund reinvestment and strong distributions. The board is proposing payment of an unchanged €0.12 per share dividend in the current year, a yield of almost 9%. Our adjusted net asset value per share is unchanged at €1.94, c 40% ahead of the share price.