Focusrite has announced the €18.0m strategic acquisition of ADAM Audio, a leading German developer and global distributor of professional studio monitor loudspeakers, funded entirely from existing cash resources. Although continuing to operate as an autonomous subsidiary, we see clear opportunities to cross-sell to Focusrite’s global customer base of amateur and professional music markers and to leverage its distribution network. We increase our forecast FY20e PBT by 5% to £13.3m and raise our DCF-based valuation to 530p per share (previously 471p).
Written by
Focusrite |
Strategic acquisition using cash resources |
Strategic acquisition |
Consumer electricals |
23 July 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 announced the €18.0m strategic acquisition of ADAM Audio, a leading German developer and global distributor of professional studio monitor loudspeakers, funded entirely from existing cash resources. Although continuing to operate as an autonomous subsidiary, we see clear opportunities to cross-sell to Focusrite’s global customer base of amateur and professional music markers and to leverage its distribution network. We increase our forecast FY20e PBT by 5% to £13.3m and raise our DCF-based valuation to 530p per share (previously 471p).
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
08/17 |
66.1 |
9.5 |
14.8 |
2.7 |
35.3 |
0.5 |
08/18 |
75.1 |
11.3 |
17.5 |
3.3 |
29.9 |
0.6 |
08/19e |
79.8 |
12.5 |
19.0 |
3.6 |
27.6 |
0.7 |
08/20e |
91.4 |
13.3 |
19.9 |
3.7 |
26.3 |
0.7 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. EPS based on diluted number of shares.
Transaction highlights
Focusrite has acquired Pro Audio, the holding company for ADAM Audio and its subsidiaries (ADAM) for a cash consideration of €18.0m (£16.2m), representing 1.4x price/sales and 18x price/earnings multiples for 2018. In the year to 31 December 2018, ADAM delivered sales of €12.9m, adj. EBITDA of €1.7m and PBT of €1.0m. Net assets at 31 December 2018 were €4.1m, mainly comprising high quality stock. After the acquisition Focusrite expects to have net cash of c £12m.
Strategically aligned with core business
ADAM places great emphasis on product design and innovation and its ranges, including the recently launched more affordable T-Series, the all-rounder professional AX-Series and flagship S-Series, are well aligned to Focusrite’s existing customer base. Although management intends for ADAM to continue operating autonomously as a subsidiary with standalone offices in Germany, the US and China, there are clear opportunities for cross-selling and to leverage Focusrite’s global distribution network.
Earnings enhancing in first full year of consolidation
We forecast ADAM’s revenue to grow modestly by 3% y-o-y and assume margins remain stable. In FY19e we factor in 1.5 months of ADAM’s sterling equivalent revenue and earnings, resulting in a modest PBT increase. In FY20e we factor in a full year of ADAM’s revenue and earnings, offset by the cautious assumption that Focusrite’s current distribution of third-party studio monitors ceases (c £3m of revenue). We increase our FY20 PBT forecast by 5% to £13.3m.
Valuation: Reflecting modest growth assumptions
Based on conservative growth assumptions for ADAM, our DCF-based valuation increases to 530p per share (vs 471p), slightly ahead of the current share price. We expect to gain greater visibility on growth prospects when the company reports FY19 results.
Exhibit 1: Financial summary
£'000s |
2017 |
2018 |
2019e |
2020e |
||
31-August |
IFRS |
IFRS |
IFRS |
IFRS |
||
INCOME STATEMENT |
||||||
Revenue |
|
|
66,055 |
75,121 |
79,786 |
91,395 |
Cost of Sales |
(39,704) |
(43,447) |
(45,469) |
(52,705) |
||
Gross Profit |
26,351 |
31,674 |
34,317 |
38,691 |
||
EBITDA |
|
|
13,109 |
15,485 |
16,264 |
17,736 |
Operating profit (before amort. and except). |
|
|
9,470 |
11,613 |
12,464 |
13,285 |
Amortisation of acquired intangibles |
0 |
0 |
0 |
0 |
||
Exceptionals |
0 |
329 |
(648) |
0 |
||
Share-based payments |
0 |
0 |
0 |
0 |
||
Reported operating profit |
9,470 |
11,942 |
11,816 |
13,285 |
||
Net Interest |
42 |
(270) |
20 |
60 |
||
Joint ventures & associates (post tax) |
0 |
0 |
0 |
0 |
||
Exceptionals |
0 |
0 |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
9,512 |
11,343 |
12,484 |
13,345 |
Profit Before Tax (reported) |
|
|
9,512 |
11,672 |
11,836 |
13,345 |
Reported tax |
(959) |
(1,199) |
(1,386) |
(1,601) |
||
Profit After Tax (norm) |
8,553 |
10,144 |
11,098 |
11,744 |
||
Profit After Tax (reported) |
8,553 |
10,473 |
10,450 |
11,744 |
||
Minority interests |
0 |
0 |
0 |
0 |
||
Discontinued operations |
0 |
0 |
0 |
0 |
||
Net income (normalised) |
8,553 |
10,144 |
11,098 |
11,744 |
||
Net income (reported) |
8,553 |
10,473 |
10,450 |
11,744 |
||
Average number of Shares Outstanding (m) |
55.4 |
56.8 |
57.7 |
58.1 |
||
EPS - normalised (p) |
|
|
15.4 |
17.9 |
19.2 |
20.2 |
EPS - normalised fully diluted (p) |
|
|
14.8 |
17.5 |
19.0 |
19.9 |
EPS - basic reported (p) |
|
|
15.4 |
18.4 |
18.1 |
20.2 |
Dividend per share (p) |
2.7 |
3.3 |
3.6 |
3.7 |
||
Revenue growth (%) |
21.6 |
13.7 |
6.2 |
14.6 |
||
Gross Margin (%) |
39.9 |
42.2 |
43.0 |
42.3 |
||
EBITDA Margin (%) |
19.8 |
20.6 |
20.4 |
19.4 |
||
Normalised Operating Margin |
14.3 |
15.5 |
15.6 |
14.5 |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
6,332 |
7,314 |
10,452 |
13,204 |
Intangible Assets |
4,963 |
6,039 |
8,895 |
11,503 |
||
Tangible Assets |
1,369 |
1,275 |
1,558 |
1,701 |
||
Investments & other |
0 |
0 |
0 |
0 |
||
Current Assets |
|
|
36,126 |
47,612 |
42,142 |
50,049 |
Stocks |
9,000 |
11,391 |
16,195 |
17,328 |
||
Debtors |
12,952 |
13,310 |
14,318 |
16,026 |
||
Cash & cash equivalents |
14,174 |
22,811 |
11,527 |
16,592 |
||
Other |
0 |
100 |
102 |
104 |
||
Current Liabilities |
|
|
(8,663) |
(11,136) |
(12,203) |
(12,844) |
Creditors |
(8,204) |
(10,709) |
(11,710) |
(12,274) |
||
Tax and social security |
(459) |
(427) |
(493) |
(570) |
||
Short term borrowings |
0 |
0 |
0 |
0 |
||
Other |
0 |
0 |
0 |
0 |
||
Long Term Liabilities |
|
|
(245) |
(300) |
(452) |
(592) |
Long term borrowings |
0 |
0 |
0 |
0 |
||
Other long term liabilities |
(245) |
(300) |
(452) |
(592) |
||
Net Assets |
|
|
33,550 |
43,490 |
39,938 |
49,818 |
Minority interests |
0 |
0 |
0 |
0 |
||
Shareholders' equity |
|
|
33,550 |
43,490 |
39,938 |
49,818 |
CASH FLOW |
||||||
Op Cash Flow before WC and tax |
13,109 |
15,485 |
16,264 |
17,736 |
||
Working capital |
407 |
(427) |
(4,810) |
(2,277) |
||
Exceptional & other |
137 |
203 |
(648) |
(0) |
||
Tax |
(633) |
(478) |
(1,386) |
(1,601) |
||
Net operating cash flow |
|
|
13,020 |
14,783 |
9,420 |
13,858 |
Capex |
(3,614) |
(4,507) |
(5,852) |
(6,704) |
||
Acquisitions (net of acquired working capital) |
0 |
0 |
(12,800) |
0 |
||
Net interest |
(42) |
(36) |
20 |
60 |
||
Equity financing |
258 |
306 |
0 |
0 |
||
Dividends |
(1,138) |
(1,679) |
(2,071) |
(2,150) |
||
Other |
84 |
(230) |
0 |
0 |
||
Net Cash Flow |
8,568 |
8,637 |
(11,284) |
5,065 |
||
Opening net debt/(cash) |
|
|
(5,606) |
(14,174) |
(22,811) |
(11,527) |
FX |
0 |
0 |
0 |
0 |
||
Other non-cash movements |
0 |
0 |
0 |
0 |
||
Closing net debt/(cash) |
|
|
(14,174) |
(22,811) |
(11,527) |
(16,592) |
Source: Focusrite accounts, Edison Investment research
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Research: Investment Companies
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