Focusrite has delivered strong FY19 results, highlighting improved revenue momentum with a favourable reception of new product releases, better-than-expected margin delivery and encouraging trading on its first major acquisition since IPO, ADAM Audio. We increase our underlying assumptions for FY20 to reflect the improved trading and gross margin benefits from a shift in sourcing, but forex translation (notably strengthening sterling versus the euro) tempers the upgrade to c 4% for FY20. Our DCF-based valuation increases to 618p from 544p.
Focusrite |
A warm tone |
FY19 results |
Consumer electricals |
20 November 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 delivered strong FY19 results, highlighting improved revenue momentum with a favourable reception of new product releases, better-than-expected margin delivery and encouraging trading on its first major acquisition since IPO, ADAM Audio. We increase our underlying assumptions for FY20 to reflect the improved trading and gross margin benefits from a shift in sourcing, but forex translation (notably strengthening sterling versus the euro) tempers the upgrade to c 4% for FY20. Our DCF-based valuation increases to 618p from 544p.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
08/18 |
75.1 |
11.3 |
17.6 |
3.3 |
30.6 |
0.6 |
08/19 |
84.7 |
13.8 |
21.4 |
3.8 |
25.2 |
0.7 |
08/20e |
95.6 |
14.2 |
21.7 |
3.9 |
24.8 |
0.7 |
08/21e |
99.0 |
14.4 |
21.9 |
4.0 |
24.7 |
0.7 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
FY19 results: Solid trends
Following the upbeat trading update in September, FY19 results were ahead of our expectations. Revenue grew by 12.7%, clean PBT by 21.2% and DPS by 15.2%. All geographic regions grew: constant currency revenue growth (ex M&A) of 5.6% improved versus the 0.5% in H119 due to a better H219 in North America (a strong reception for the new Scarlett interface) and rest of world. The gross margin of 42.2% was stable year on year, a good performance given the continuous US tariff increases. To mitigate further US tariff increases, Focusrite will source US production for Scarlett from Malaysia rather than China. By product category, Focusrite was the key driver of growth, whereas Focusrite Pro and Novation were affected by products coming to the end of their lifecyles; relaunches post year-end provide support for a better FY20. The recent acquisition, ADAM Audio, contributed for just six weeks of FY19, but is performing slightly ahead of expectations.
Underlying upgrades for FY20
We have upgraded our underlying FY20 forecasts, reflecting improved underlying trading in the US, and increased gross margin due to the benefit of shift of sourcing to Malaysia. We assume underlying revenue growth of 2–3% in North America and EMEA, and 5% in rest of world for FY20 and FY21. We now assume gross margin increases by 20bp in FY20, versus a 50bp deterioration previously. The weakening euro (current €1.17/£ versus FY19 blended €1.11) is a translational headwind to Focusrite’s euro-based revenue with limited euro-based costs. Our PBT forecast for FY20 increases by c 4% from £13.7m to £14.2m.
Valuation: DCF valuation upgraded by 13%
Our DCF-based valuation increases to 618p from 544p to reflect the upgrades to estimates and rolling forward the DCF. On our new forecasts the EV/EBITDA multiple for FY20 and FY21 are 16.1x and 15.5x respectively.
Exhibit 1: Financial summary
£'k |
2017 |
2018 |
2019 |
2020e |
2021e |
||
31-August |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
INCOME STATEMENT |
|||||||
Revenue |
|
|
66,055 |
75,121 |
84,665 |
95,645 |
98,992 |
Cost of Sales |
(39,704) |
(43,447) |
(48,899) |
(55,091) |
(56,822) |
||
Gross Profit |
26,351 |
31,674 |
35,766 |
40,553 |
42,171 |
||
EBITDA |
|
|
13,109 |
15,485 |
17,197 |
18,521 |
19,257 |
Operating profit (before amort. and except). |
|
|
9,470 |
11,613 |
13,549 |
14,069 |
14,193 |
Amortisation of acquired intangibles |
0 |
0 |
0 |
0 |
0 |
||
Exceptionals |
0 |
329 |
(737) |
0 |
0 |
||
Share-based payments |
0 |
0 |
0 |
0 |
0 |
||
Reported operating profit |
9,470 |
11,942 |
12,812 |
14,069 |
14,193 |
||
Net Interest |
42 |
(270) |
201 |
150 |
200 |
||
Joint ventures & associates (post tax) |
0 |
0 |
0 |
0 |
0 |
||
Exceptionals |
0 |
0 |
0 |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
9,512 |
11,343 |
13,750 |
14,219 |
14,393 |
Profit Before Tax (reported) |
|
|
9,512 |
11,672 |
13,013 |
14,219 |
14,393 |
Reported tax |
(959) |
(1,199) |
(1,349) |
(1,635) |
(1,655) |
||
Profit After Tax (norm) |
8,553 |
10,144 |
12,401 |
12,584 |
12,738 |
||
Profit After Tax (reported) |
8,553 |
10,473 |
11,664 |
12,584 |
12,738 |
||
Minority interests |
0 |
0 |
0 |
0 |
0 |
||
Discontinued operations |
0 |
0 |
0 |
0 |
0 |
||
Net income (normalised) |
8,553 |
10,207 |
12,401 |
12,584 |
12,738 |
||
Net income (reported) |
8,553 |
10,473 |
11,664 |
12,584 |
12,738 |
||
Average number of Shares Outstanding (m) |
55.4 |
56.8 |
57.7 |
58.1 |
58.1 |
||
EPS - normalised (p) |
|
|
14.8 |
17.9 |
20.0 |
20.8 |
21.8 |
EPS - normalised fully diluted (p) |
|
|
14.8 |
17.6 |
21.4 |
21.7 |
21.9 |
EPS - basic reported (p) |
|
|
15.4 |
18.4 |
20.2 |
21.7 |
21.9 |
Dividend per share (p) |
2.7 |
3.3 |
3.8 |
3.9 |
4.0 |
||
Revenue growth (%) |
21.6 |
13.7 |
12.7 |
13.0 |
3.5 |
||
Gross Margin (%) |
39.9 |
42.2 |
42.2 |
42.4 |
42.6 |
||
EBITDA Margin (%) |
19.8 |
20.6 |
20.3 |
19.4 |
19.5 |
||
Normalised Operating Margin |
14.3 |
15.5 |
16.0 |
14.7 |
14.3 |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
6,332 |
7,314 |
25,705 |
15,882 |
17,175 |
Intangible Assets |
4,963 |
6,039 |
24,103 |
14,088 |
15,256 |
||
Tangible Assets |
1,369 |
1,275 |
1,602 |
1,794 |
1,919 |
||
Investments & other |
0 |
0 |
0 |
0 |
0 |
||
Current Assets |
|
|
36,126 |
47,612 |
48,875 |
55,365 |
64,806 |
Stocks |
9,000 |
11,391 |
15,182 |
16,603 |
17,903 |
||
Debtors |
12,952 |
13,310 |
18,188 |
15,722 |
16,002 |
||
Cash & cash equivalents |
14,174 |
22,811 |
15,505 |
23,040 |
30,902 |
||
Other |
0 |
100 |
0 |
0 |
0 |
||
Current Liabilities |
|
|
(8,663) |
(11,136) |
(16,282) |
(13,579) |
(13,212) |
Creditors |
(8,204) |
(10,709) |
(15,664) |
(12,830) |
(12,454) |
||
Tax and social security |
(459) |
(427) |
(618) |
(749) |
(758) |
||
Short term borrowings |
0 |
0 |
0 |
0 |
0 |
||
Other |
0 |
0 |
0 |
0 |
0 |
||
Long Term Liabilities |
|
|
(245) |
(300) |
(4,284) |
(2,006) |
(2,271) |
Long term borrowings |
0 |
0 |
0 |
0 |
0 |
||
Other long term liabilities |
(245) |
(300) |
(4,284) |
(2,006) |
(2,271) |
||
Net Assets |
|
|
33,550 |
43,490 |
54,014 |
55,663 |
66,497 |
Minority interests |
0 |
0 |
0 |
0 |
0 |
||
Shareholders' equity |
|
|
33,550 |
43,490 |
54,014 |
55,663 |
66,497 |
CASH FLOW |
|||||||
Op Cash Flow before WC and tax |
13,109 |
15,485 |
17,197 |
18,521 |
19,257 |
||
Working capital |
407 |
(426) |
(2,313) |
(1,790) |
(1,954) |
||
Exceptional & other |
137 |
203 |
(386) |
(0) |
(0) |
||
Tax |
(633) |
(478) |
(825) |
(1,635) |
(1,655) |
||
Net operating cash flow |
|
|
13,020 |
14,784 |
13,673 |
15,096 |
15,647 |
Capex |
(3,614) |
(4,512) |
(4,943) |
(5,504) |
(5,697) |
||
Acquisitions (net of acquired working capital) |
0 |
0 |
(14,274) |
0 |
0 |
||
Net interest |
(42) |
(36) |
58 |
150 |
200 |
||
Equity financing |
258 |
306 |
0 |
0 |
0 |
||
Dividends |
(1,138) |
(1,679) |
(2,005) |
(2,206) |
(2,289) |
||
Other |
84 |
(226) |
185 |
0 |
0 |
||
Net Cash Flow |
8,568 |
8,637 |
(7,306) |
7,535 |
7,861 |
||
Opening net debt/(cash) |
|
|
(5,606) |
(14,174) |
(22,811) |
(15,505) |
(23,040) |
FX |
0 |
0 |
0 |
0 |
0 |
||
Other non-cash movements |
0 |
0 |
0 |
0 |
0 |
||
Closing net debt/(cash) |
|
|
(14,174) |
(22,811) |
(15,505) |
(23,040) |
(30,901) |
Source: Company accounts, Edison Investment Research
|
|
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