Focusrite — Cautious optimism after significant challenges

Focusrite (TUNE)

Last close As at 03/12/2024

GBP2.88

13.00 (4.73%)

Market capitalisation

GBP171m

More on this equity

Research: Consumer

Focusrite — Cautious optimism after significant challenges

Focusrite’s (TUNE’s) FY24 results highlight the negative effects of the most challenging year the CEO has faced. While the company’s main operating market has been difficult, management has continued to invest in development and release new products, which have enabled TUNE to outperform and gain share across all markets in FY24, and should enable it to thrive when conditions improve. With signs of stabilisation in its most important segment, TUNE’s valuation looks attractive.

Russell Pointon

Written by

Russell Pointon

Director of Content, Consumer and Media

Consumer

Focusrite

Cautious optimism after significant challenges

Consumer electricals

QuickView

28 November 2024

Price

265p

Market cap

£157m

Share price graph

Share details

Code

TUNE

Listing

LSE

Shares in issue

59.2m

Business description

Focusrite is a global music and audio products group supplying hardware and software used by professional and amateur musicians and the entertainment industry that enables the high-quality creation and reproduction of music.

Bull

Long-term structural growth for the creation and consumption of music.

Leading brands, key sales partnerships in place.

Experienced management team with a proven track record.

Bear

Changing and competitive markets require regular new products.

Far East sourcing ensures the company is exposed to changes in freight rates and pricing of commodities.

Potential for greater tariffs but the company is looking to mitigate.

Analyst

Russell Pointon

+44 (0)20 3077 5700

Focusrite’s (TUNE’s) FY24 results highlight the negative effects of the most challenging year the CEO has faced. While the company’s main operating market has been difficult, management has continued to invest in development and release new products, which have enabled TUNE to outperform and gain share across all markets in FY24, and should enable it to thrive when conditions improve. With signs of stabilisation in its most important segment, TUNE’s valuation looks attractive.

FY24 results: Headlines flagged in trading update

Group revenue declined 11% y-o-y (10% organically) to £158.5m and adjusted EBITDA declined by c 35% to £25.2m. The results reflect that TUNE’s two key divisions were pulled in opposite directions. The Audio Reproduction division provided strong growth (+14% organic) as it continued to enjoy the post-pandemic recovery of attendance at live events etc. The overall group decline in revenue is attributed to weakness in TUNE’s largest division, Content Creation (c 70% of group revenue, -17% organic), due to macroeconomic weakness and de-stocking in the supply chain post the COVID-19 pandemic.

Growth expectations

Over the medium term, management targets mid/high-single-digit organic revenue growth, with the assumptions that TUNE will grow in new products and take market share in its newer brands. For the current year, there are welcome signs of stabilisation in Content Creation, while management expects to outperform a slowing (ie post-pandemic recovery normalising) Audio Reproduction market. Current trading for the first three months of FY25 is in line with expectations, against a tough comparative. Consensus is forecasting modest revenue growth of c 2–3% in FY25 and FY26.

Valuation: Well below long-term average multiples

Having proven to be a beneficiary of the pandemic, the subsequent retracement of the share price and profitability as trading normalised and cost pressures increased has led to TUNE trading at a significant discount to historical multiples. For FY25 and FY26, its prospective EV/sales multiples of 1.1x and 1.0x, respectively, are well below its long-term (since FY15) average multiple of 2.2x, when we exclude FY21 and FY22. They are comparable with its all-time low multiple. Similarly, its FY25 and FY26 EV/EBITDA multiples of 6.8x and 6.6x compare with its average multiple of 11.0x, when FY21 and FY22 are excluded. A return to more positive trading should be helpful for its valuation. TUNE’s attractive relative valuation featured in our recent sector report.

Consensus estimates

Year
end

Revenue
(£m)

EBITDA
(£m)

EPS
(p)

DPS
(p)

P/E
(x)

Yield
(%)

08/23

178.5

38.6

18.0

6.6

14.7

2.5

08/24

158.5

25.2

38.4

6.6

6.9

2.5

08/25e

161.1

25.1

N/A

7.0

N/A

2.6

08/26e

166.3

25.9

N/A

7.0

N/A

2.6

Source: LSEG Data & Analytics, 27 November 2024

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General disclaimer and copyright

This report has been prepared and issued by Edison. Edison Investment Research standard fees are £60,000 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 research department of Edison 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.

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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 2024 Edison Investment Research Limited (Edison).

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). 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.

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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

This document is prepared and provided by Edison 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.

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.

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

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.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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