Focusrite reports a strong November, leaving its Q1 ahead year-on-year, a positive result compared with many retailers. While its wide international spread is helpful, uncertainties remain on consumer markets generally, on US tariffs and on Brexit. We retain a cautious forecasting stance, while the valuation reflects the ongoing potential of its market-leading brands.
Written by
Focusrite |
Positive trading update to November |
AGM & trading update |
Consumer electronics |
21 December 2018 |
Share price performance
Business description
Next events
Analysts
Focusrite is a research client of Edison Investment Research Limited |
|||||||||||||||||||||||||||||||||||||||||||||||
Focusrite reports a strong November, leaving its Q1 ahead year-on-year, a positive result compared with many retailers. While its wide international spread is helpful, uncertainties remain on consumer markets generally, on US tariffs and on Brexit. We retain a cautious forecasting stance, while the valuation reflects the ongoing potential of its market-leading brands.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
EV/EBITDA |
Yield |
08/17 |
66.1 |
9.5 |
14.8 |
2.7 |
32.1 |
20.0 |
0.6 |
08/18 |
75.1 |
11.3 |
17.5 |
3.3 |
27.1 |
16.9 |
0.7 |
08/19e |
78.0 |
11.8 |
17.9 |
3.6 |
26.6 |
16.5 |
0.7 |
08/20e |
81.7 |
12.0 |
18.0 |
3.7 |
26.3 |
15.3 |
0.8 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
A small…
With its December AGM, Focusrite updates on trading to November, which is only a month beyond the comment in the final results. We published an extended note, The song remains the same, in November 2018.
…but significant update
Trading was strong in the important month of November, having been ‘broadly similar’ in September and October. As a result, the first quarter ends ahead of Q118. The November result is significant because Q118 was itself a strong quarter driven by a boost in pre-Christmas demand.
Maintaining modest growth forecast
While positive progress for Q1 is encouraging, the consumer environment clearly remains uncertain, especially in Europe. In our November note, we considered the sensitivity of results to US tariffs on goods sourced in China, along with our forecast assumptions. While there have been indications that the trade dispute is moving towards a negotiation phase, the disposition remains uncertain and currently the US still plans to increase the relevant import tariffs from 10% to 25%. We also set out the (lower-level) sensitivities to a no-deal Brexit, which clearly remain. For all these reasons, we make no change to our forecast of modest 4% PBT growth for FY19.
Valuation: Does not reflect cash utilisation
The current share price is broadly equivalent to the DCF, as set out in our November note. This assumes 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%. That excludes investment returns on Focusrite’s excess cash of £22.8m (at August 2018), which at a P/E of 20x would represent 39p of additional value, we calculate.
Exhibit 1: Financial summary
£'000s |
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: Investment Companies
The Scottish Investment Trust (SCIN) seeks to provide investors with capital growth and a growing income, by investing in companies around the globe that are unloved by the majority of investors. The core of its portfolio (74% at 31 October 2018) is in ‘ugly ducklings’ – stocks that are both out of favour and operationally challenged – as lead manager Alasdair McKinnon says these can generate higher than average returns over the longer term. Because of its contrarian style, SCIN has no benchmark, and generally is not exposed to ‘hot money’ investments like US and Chinese internet stocks, instead focusing on areas such as bricks-and-mortar retail (where the manager sees the perceived threat from online competition as overdone), European and Japanese banks, ‘big pharma’ (which McKinnon sees as having stronger long-term prospects than they are currently being given credit for) and gold miners. SCIN recently announced its 35th consecutive annual dividend rise and offers one of the highest yields in its peer group, at 3.2% (2.7% excluding special dividends).