Growth in revenue and cash is strong after four months of trading. Focusrite continues to build on its leadership positions in international markets, and to benefit from its c 85% non-UK market exposure. Further growth in cash is also encouraging as it suggests good profit conversion despite expected cost increases. If these independent growth trends continue to the half-year, we would see upside risk to our forecasts.
Focusrite |
Music therapy |
January trading statement |
Consumer electronics |
10 January 2018 |
Share price performance
Business description
Next events
Analysts
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Growth in revenue and cash is strong after four months of trading. Focusrite continues to build on its leadership positions in international markets, and to benefit from its c 85% non-UK market exposure. Further growth in cash is also encouraging as it suggests good profit conversion despite expected cost increases. If these independent growth trends continue to the half-year, we would see upside risk to our forecasts.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
EV/ |
Yield |
08/16 |
54.3 |
7.7 |
11.8 |
2.0 |
28.9 |
18.8 |
0.6 |
08/17 |
66.1 |
9.5 |
14.8 |
2.7 |
23.0 |
14.0 |
0.8 |
08/18e |
72.7 |
10.0 |
15.3 |
3.0 |
22.2 |
13.3 |
0.9 |
08/19e |
78.6 |
10.6 |
15.9 |
3.3 |
21.4 |
12.4 |
1.0 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Growth continues strongly
In November management reported that revenue and cash had grown “further” since the August year end, with “strong” market acceptance of the expanding portfolio. Now, the growth itself is described as “strong”, and it has moreover continued through November and December. The word ‘strong’ (which was also used about FY17’s constant currency growth of 13%) indicates a firming position, as well as the fact that the four months to December are a more significant period.
Building on international market position
Focusrite derives c 85% of revenue from non-UK sources, positioning it well in structurally sound international markets such as the US and Far East. We understand that trends seen in FY17 have broadly continued. Those were, firstly, growth in all geographies, but led by the US and Rest of World (mainly Asia), and secondly growth in both divisions, led by Novation. Focusrite continues to build its leading international positions in its specialised markets of audio interfaces and sound generation.
We retain our forecast with confidence
Revenue growth comparable with FY17’s constant currency growth of 13.5% would be above our FY18 revenue forecast of 10% (constant currency: 8%). We already forecast cost increases on the two new brand groups Focusrite Pro and Ampify (see our Outlook note), as well as in e-commerce. However, strong growth in cash also suggests good profit conversion despite higher costs. We therefore retain added confidence in our forecast, with upside risk if these trends continue to the half year.
Valuation: Does not reflect forecast upside
As we are not changing our forecast, we retain our DCF valuation of 363p/share for now. This would put the shares on an FY18e P/E of 23.7x and EV/EBITDA of 14.2x. We include in our valuation year-end cash of £14.2m reported at the August year end, although cash is also reported as having grown strongly. The use of that cash could also be supportive of the valuation.
Exhibit 1: Financial summary
£'000s |
2015 |
2016 |
2017 |
2018e |
2019e |
2020e |
||
31-August |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
INCOME STATEMENT |
||||||||
Revenue |
|
|
48,029 |
54,301 |
66,055 |
72,715 |
78,564 |
84,850 |
Cost of Sales |
(29,381) |
(33,439) |
(39,704) |
(42,460) |
(45,876) |
(49,546) |
||
Gross Profit |
18,648 |
20,862 |
26,351 |
30,254 |
32,688 |
35,303 |
||
EBITDA |
|
|
9,302 |
10,249 |
13,109 |
13,834 |
14,790 |
15,634 |
Operating profit (before amort. and except). |
|
7,024 |
7,677 |
9,470 |
9,963 |
10,515 |
11,037 |
|
Amortisation of acquired intangibles |
0 |
0 |
0 |
0 |
0 |
0 |
||
Exceptionals |
(704) |
(537) |
0 |
0 |
0 |
0 |
||
Share-based payments |
0 |
0 |
0 |
0 |
0 |
0 |
||
Reported operating profit |
6,320 |
7,140 |
9,470 |
9,963 |
10,515 |
11,037 |
||
Net Interest |
164 |
(14) |
42 |
40 |
45 |
50 |
||
Joint ventures & associates (post tax) |
0 |
0 |
0 |
0 |
0 |
0 |
||
Exceptionals |
0 |
0 |
0 |
0 |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
7,188 |
7,663 |
9,512 |
10,003 |
10,560 |
11,087 |
Profit Before Tax (reported) |
|
|
6,484 |
7,126 |
9,512 |
10,003 |
10,560 |
11,087 |
Reported tax |
(1,022) |
(870) |
(959) |
(1,200) |
(1,426) |
(1,663) |
||
Profit After Tax (norm) |
6,166 |
6,793 |
8,553 |
8,803 |
9,135 |
9,424 |
||
Profit After Tax (reported) |
5,462 |
6,256 |
8,553 |
8,803 |
9,135 |
9,424 |
||
Minority interests |
0 |
0 |
0 |
0 |
0 |
0 |
||
Discontinued operations |
0 |
0 |
0 |
0 |
0 |
0 |
||
Net income (normalised) |
6,166 |
6,900 |
8,553 |
8,803 |
9,135 |
9,424 |
||
Net income (reported) |
5,462 |
6,256 |
8,553 |
8,803 |
9,135 |
9,424 |
||
Basic average number of shares outstanding (m) |
52.4 |
53.2 |
55.4 |
56.0 |
56.0 |
56.0 |
||
EPS - basic normalised (p) |
|
|
11.8 |
13.0 |
15.4 |
15.7 |
16.3 |
16.8 |
EPS - normalised (p) |
|
|
10.5 |
11.8 |
14.8 |
15.3 |
15.9 |
16.4 |
EPS - basic reported (p) |
|
|
10.4 |
11.8 |
15.4 |
15.7 |
16.3 |
16.8 |
Dividend per share (p) |
1.80 |
1.95 |
2.70 |
2.95 |
3.30 |
3.65 |
||
Revenue growth (%) |
17.2 |
13.1 |
21.6 |
10.1 |
8.0 |
8.0 |
||
Gross Margin (%) |
38.8 |
38.4 |
39.9 |
41.6 |
41.6 |
41.6 |
||
EBITDA Margin (%) |
19.4 |
18.9 |
19.8 |
19.0 |
18.8 |
18.4 |
||
Normalised Operating Margin |
14.6 |
14.1 |
14.3 |
13.7 |
13.4 |
13.0 |
||
BALANCE SHEET |
||||||||
Fixed Assets |
|
|
5,264 |
6,367 |
6,332 |
7,392 |
8,416 |
9,544 |
Intangible Assets |
3,941 |
4,792 |
4,963 |
6,159 |
7,367 |
8,651 |
||
Tangible Assets |
1,323 |
1,575 |
1,369 |
1,233 |
1,050 |
893 |
||
Investments & other |
0 |
0 |
0 |
0 |
0 |
0 |
||
Current Assets |
|
|
22,766 |
28,191 |
36,126 |
41,974 |
48,775 |
55,221 |
Stocks |
8,633 |
11,361 |
9,000 |
9,888 |
12,569 |
13,574 |
||
Debtors |
7,737 |
11,224 |
12,952 |
14,457 |
15,620 |
17,335 |
||
Cash & cash equivalents |
6,173 |
5,606 |
14,174 |
17,629 |
20,586 |
24,312 |
||
Other |
223 |
0 |
0 |
0 |
0 |
0 |
||
Current Liabilities |
|
|
(8,809) |
(9,256) |
(8,663) |
(9,116) |
(9,899) |
(10,466) |
Creditors |
(8,406) |
(8,612) |
(8,204) |
(8,657) |
(9,354) |
(9,830) |
||
Tax and social security |
(403) |
(644) |
(459) |
(459) |
(545) |
(636) |
||
Short term borrowings |
0 |
0 |
0 |
0 |
0 |
0 |
||
Other |
0 |
0 |
0 |
0 |
0 |
0 |
||
Long Term Liabilities |
|
|
(743) |
(282) |
(245) |
(309) |
(375) |
(444) |
Long term borrowings |
0 |
0 |
0 |
0 |
0 |
0 |
||
Other long term liabilities |
(743) |
(282) |
(245) |
(309) |
(375) |
(444) |
||
Net Assets |
|
|
18,478 |
25,020 |
33,550 |
39,940 |
46,918 |
53,855 |
Minority interests |
0 |
0 |
0 |
0 |
0 |
0 |
||
Shareholders' equity |
|
|
18,478 |
25,020 |
33,550 |
39,940 |
46,918 |
53,855 |
CASH FLOW |
||||||||
Op Cash Flow before WC and tax |
9,302 |
10,249 |
13,109 |
13,834 |
14,790 |
15,634 |
||
Working capital |
(1,689) |
(6,009) |
407 |
(2,606) |
(3,147) |
(2,243) |
||
Exceptional & other |
(591) |
(417) |
137 |
(0) |
(0) |
(0) |
||
Tax |
(838) |
(165) |
(633) |
(1,200) |
(1,426) |
(1,663) |
||
Net operating cash flow |
|
|
6,184 |
3,658 |
13,020 |
10,028 |
10,217 |
11,727 |
Capex |
(3,559) |
(3,675) |
(3,614) |
(4,960) |
(5,423) |
(5,934) |
||
Acquisitions/disposals |
0 |
0 |
0 |
0 |
0 |
0 |
||
Net interest |
6 |
(111) |
(42) |
40 |
45 |
50 |
||
Equity financing |
0 |
172 |
258 |
0 |
0 |
0 |
||
Dividends |
(314) |
(976) |
(1,138) |
(1,653) |
(1,882) |
(2,118) |
||
Other |
53 |
365 |
84 |
0 |
0 |
0 |
||
Net Cash Flow |
2,370 |
(567) |
8,568 |
3,455 |
2,957 |
3,725 |
||
Opening net debt/(cash) |
|
|
(3,803) |
(6,173) |
(5,606) |
(14,174) |
(17,629) |
(20,586) |
FX |
0 |
0 |
0 |
0 |
0 |
0 |
||
Other non-cash movements |
0 |
0 |
0 |
0 |
0 |
0 |
||
Closing net debt/(cash) |
|
|
(6,173) |
(5,606) |
(14,174) |
(17,629) |
(20,586) |
(24,312) |
Source: Company accounts, Edison Investment Research
|
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In January 2018, ASLAN announced that it had fully acquired the global commercial rights to varlitinib from its partner, Array BioPharma. Previously, the agreement stipulated that ASLAN develop the drug and sublicense it, and we view the current agreement as a significant improvement. We believe that ASLAN brings significant value to the table in Asian development capacity. The licence is now consistent with the goal of directly commercialising varlitinib in the US and parts of Asia.