Focusrite has positioned itself in a way that makes its shares a particularly attractive investment: leadership in a niche product area protected from general consumer swings; an international market structure that makes it relatively currency agnostic; a habit of profit over delivery; a strong and further strengthening balance sheet; and an undemanding valuation. This first half trading statement confirms every one of those points.
Written by
Focusrite |
Right focus |
Trading update |
Consumer electronics |
20 March 2017 |
Share price performance
Business description
Next events
Analysts
Focusrite is a research client of Edison Investment Research Limited |
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Focusrite has positioned itself in a way that makes its shares a particularly attractive investment: leadership in a niche product area protected from general consumer swings; an international market structure that makes it relatively currency agnostic; a habit of profit over delivery; a strong and further strengthening balance sheet; and an undemanding valuation. This first half trading statement confirms every one of those points.
Year |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
EV/EBITDA |
Yield |
08/15 |
48.0 |
7.2 |
10.5 |
1.8 |
19.3 |
11.9 |
0.9 |
08/16 |
54.3 |
7.7 |
11.8 |
2.0 |
17.2 |
10.9 |
1.0 |
08/17e |
62.6 |
8.0 |
12.1 |
2.1 |
16.8 |
10.1 |
1.0 |
08/18e |
68.3 |
8.8 |
13.3 |
2.3 |
15.3 |
8.9 |
1.1 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Niche product area
The second half of 2016 was dominated by the successful launch of the second-generation Scarlett. In addition, in the first half of this financial year there has been notable strength in the Novation Launchpad range across Focusrite’s markets.
International market structure
Continued demand in the US has driven strong sales growth there. The Rest of World region is responding to management focus, and Europe has remained positive.
Profit over-delivery
We are leaving our forecasts unchanged for now in expectation of additional margin and cost detail at the interim results on 3 May. However, we believe the risk to market forecasts is now on the upside.
Strengthening balance sheet
The balance sheet has been debt free since IPO in 2014. Since then cash has strengthened and continues to do so. Cash flow is not heavily seasonal and the February 2017 cash position of £9.4m is well above our August 2017 forecast of £7.5m.
Undemanding valuation
The shares are trading at a 2017 calendar P/E of 16.8x on our existing forecasts, which represents a 14% discount to the peer group and is below our November 2016 DCF valuation of 214p. Given that our forecasts already anticipate double-digit earnings growth in 2017 with further upgrade potential, together with a 1% dividend yield, and that there is cash on the balance sheet of 16p per share that accounts for around one point of P/E, we do not see the shares as expensive.
Strong constant currency first half trading
Focusrite has updated on first half trading in advance of its interim results on 3 May. Revenue is up by 23% at £32m. This includes underlying constant currency growth of 12%, which compares favourably with our assumption of 8% for the full year. The consistently strengthening balance sheet has also become a theme this year, confirmed by the end-February cash balance of £9.4m.
US leads geographical sales
Trading strength has been led by the US, which is Focusrite’s largest market. The Rest of World region has also performed strongly, responding to management focus, with a Hong Kong sales office opened in 2016. The Europe, Middle East and Africa region has also grown despite political uncertainties.
Balance sheet further strengthening
Focusrite has had a strong balance sheet since it came to the AIM market in December 2014. The cash flow does not show significant seasonality and between February 2015 and August 2016, the reported cash balance moved in a range of £4.0-6.2m. In its January 2017 update, the company noted that cash generation was strong in both November and December. This has now been confirmed with a cash balance of £9.4m at the end February, largely as a result of improved working capital, particularly stock control.
Valuation
The shares are trading at a calendar 2017 P/E of 16.8x on our existing forecast, which represents a 14% discount to the peer group we referred to in our November 2016 update. It is also trading below our November 2016 DCF valuation of 214p. Given that our forecasts already anticipate double-digit earnings growth with further upgrade potential, together with a 1% dividend yield, and that there is cash on the balance sheet of 16p per share that accounts for around one point of P/E, we do not see this price level as expensive.
Exhibit 1: Financial summary
£'000s |
2015 |
2016 |
2017e |
2018e |
2019e |
||
31 August |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
INCOME STATEMENT |
|||||||
Revenue |
|
|
48,029 |
54,301 |
62,600 |
68,342 |
73,809 |
Cost of Sales |
(29,381) |
(33,439) |
(39,448) |
(42,604) |
(46,012) |
||
Gross Profit |
18,648 |
20,862 |
23,152 |
25,738 |
27,797 |
||
EBITDA |
|
|
9,302 |
10,249 |
10,918 |
11,953 |
12,510 |
Normalised operating profit |
|
|
7,024 |
7,677 |
8,042 |
8,815 |
9,012 |
Amortisation of acquired intangibles |
0 |
0 |
0 |
0 |
0 |
||
Exceptionals |
(704) |
(537) |
0 |
0 |
0 |
||
Share-based payments |
0 |
0 |
0 |
0 |
0 |
||
Reported operating profit |
6,320 |
7,140 |
8,042 |
8,815 |
9,012 |
||
Net Interest |
164 |
(14) |
0 |
0 |
0 |
||
Joint ventures & associates (post tax) |
0 |
0 |
0 |
0 |
0 |
||
Exceptionals |
0 |
0 |
0 |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
7,188 |
7,663 |
8,042 |
8,815 |
9,012 |
Profit Before Tax (reported) |
|
|
6,484 |
7,126 |
8,042 |
8,815 |
9,012 |
Reported tax |
(1,022) |
(870) |
(965) |
(1,058) |
(1,352) |
||
Profit After Tax (norm) |
6,166 |
6,793 |
7,077 |
7,757 |
7,660 |
||
Profit After Tax (reported) |
5,462 |
6,256 |
7,077 |
7,757 |
7,660 |
||
Minority interests |
0 |
0 |
0 |
0 |
0 |
||
Discontinued operations |
0 |
0 |
0 |
0 |
0 |
||
Net income (normalised) |
6,166 |
6,900 |
7,077 |
7,757 |
7,660 |
||
Net income (reported) |
5,462 |
6,256 |
7,077 |
7,757 |
7,660 |
||
Basic average number of shares outstanding (m) |
52.4 |
53.2 |
54.1 |
55.1 |
55.1 |
||
EPS - basic normalised (p) |
|
|
11.8 |
13.0 |
13.1 |
14.1 |
13.9 |
EPS - diluted normalised (p) |
|
|
10.5 |
11.8 |
12.1 |
13.3 |
13.1 |
EPS - basic reported (p) |
|
|
10.4 |
11.8 |
13.1 |
14.1 |
13.9 |
Dividend (p) |
1.80 |
1.95 |
2.10 |
2.25 |
2.40 |
||
Revenue growth (%) |
17.2 |
13.1 |
15.3 |
9.2 |
0.0 |
||
Gross Margin (%) |
38.8 |
38.4 |
37.0 |
37.7 |
37.7 |
||
EBITDA Margin (%) |
19.4 |
18.9 |
17.4 |
17.5 |
16.9 |
||
Normalised Operating Margin |
14.6 |
14.1 |
12.8 |
12.9 |
12.2 |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
5,264 |
6,367 |
7,597 |
9,020 |
10,448 |
Intangible Assets |
3,941 |
4,792 |
5,498 |
6,506 |
7,534 |
||
Tangible Assets |
1,323 |
1,575 |
2,099 |
2,513 |
2,914 |
||
Investments & other |
0 |
0 |
0 |
0 |
0 |
||
Current Assets |
|
|
22,766 |
28,191 |
34,472 |
40,272 |
45,798 |
Stocks |
8,633 |
11,361 |
14,158 |
15,407 |
16,640 |
||
Debtors |
7,737 |
11,224 |
12,863 |
14,230 |
15,368 |
||
Cash & cash equivalents |
6,173 |
5,606 |
7,451 |
10,635 |
13,790 |
||
Other |
223 |
0 |
0 |
0 |
0 |
||
Current Liabilities |
|
|
(8,809) |
(9,256) |
(10,911) |
(11,733) |
(12,799) |
Creditors |
(8,406) |
(8,612) |
(10,267) |
(11,089) |
(11,976) |
||
Tax and social security |
(403) |
(644) |
(644) |
(644) |
(823) |
||
Short term borrowings |
0 |
0 |
0 |
0 |
0 |
||
Other |
0 |
0 |
0 |
0 |
0 |
||
Long Term Liabilities |
|
|
(743) |
(282) |
(328) |
(393) |
(459) |
Long term borrowings |
0 |
0 |
0 |
0 |
0 |
||
Other long term liabilities |
(743) |
(282) |
(328) |
(393) |
(459) |
||
Net Assets |
|
|
18,478 |
25,020 |
30,831 |
37,167 |
42,989 |
Minority interests |
0 |
0 |
0 |
0 |
0 |
||
Shareholders' equity |
|
|
18,478 |
25,020 |
30,831 |
37,167 |
42,989 |
CASH FLOW |
|||||||
Op Cash Flow before WC and tax |
9,302 |
10,249 |
10,918 |
11,953 |
12,510 |
||
Working capital |
(1,689) |
(6,009) |
(2,781) |
(1,795) |
(1,484) |
||
Exceptional & other |
(591) |
(417) |
(0) |
(0) |
(0) |
||
Tax |
(838) |
(165) |
(965) |
(1,058) |
(1,352) |
||
Net operating cash flow |
|
|
6,184 |
3,658 |
7,172 |
9,100 |
9,674 |
Capex |
(3,559) |
(3,675) |
(4,191) |
(4,677) |
(5,173) |
||
Acquisitions/disposals |
0 |
0 |
0 |
0 |
0 |
||
Net interest |
6 |
(111) |
0 |
0 |
0 |
||
Equity financing |
0 |
172 |
0 |
0 |
0 |
||
Dividends |
(314) |
(976) |
(1,136) |
(1,239) |
(1,346) |
||
Other |
53 |
365 |
0 |
0 |
0 |
||
Net Cash Flow |
2,370 |
(567) |
1,845 |
3,184 |
3,155 |
||
Opening net debt/(cash) |
|
|
(3,803) |
(6,173) |
(5,606) |
(7,451) |
(10,635) |
FX |
0 |
0 |
0 |
0 |
0 |
||
Other non-cash movements |
0 |
0 |
0 |
0 |
0 |
||
Closing net debt/(cash) |
|
|
(6,173) |
(5,606) |
(7,451) |
(10,635) |
(13,790) |
Source: Edison Investment Research, Focusrite
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Is Private Equity (ISGSY) makes direct private equity investments in mid-sized Turkish companies with the aim of providing capital gains and attractive dividends. 2016 was a year of considerable uncertainty in Turkey, creating challenging market conditions for ISGSY’s investee companies and for the wider Turkish economy. Despite this, valuations have remained resilient, with a like-for-like fall of 2.5% versus a reduction of c 4% in 2015, which was arguably a less turbulent year. Including a further TRY10m investment in one of its leisure businesses, PE investments comprised 54% of total assets at 31 December 2016, up from 51% at the end of FY15. The discount to NAV remains over 50%, but further political stabilisation following a referendum in April 2017 could cause this to narrow.