Focusrite PLC (LON:TUNE) continues to deliver solid growth supplying the changing music content creation market with a steady stream of well-received new products. Interim results showed a 3% increase in adjusted EBITDA (to £4.8m) despite increased marketing, and the board’s confidence is demonstrated in an 8% dividend increase. With the company’s experienced management team and excellent track record, we see potential for Focusrite to augment organic growth with complementary acquisitions at some stage. Yet based on consensus the FY16e EV/EBITDA is only 9.6x.
Clear strategy for growth
A market leader in audio interfaces (used to record music), Focusrite is well diversified by product, price points (hardware typically from $100-2,000+) and geography (160 countries). It believes it has only a 10% share of its addressable market, with plenty of scope to grow through new product innovations (R&D 6-7% of revenue, 19 new products in FY15). Digital channels such as YouTube and social media encourage content creation and Focusrite is tapping into the music opportunity, eg with its Circuit ‘grid’ and Launchpad app (more than four million downloads), which make it very easy to create electronic music.
Interim results and consensus forecasts
Focusrite has grown steadily, with EBITDA up from £1.3m in FY09 to £9.3m in FY15. H116 revenue (£25.9m) was 8.7% up on H115 with double-digit growth in Q216. Adjusted EBIT was flat at £3.7m (higher plc-related costs and marketing), but reported PBT fell to £2.4m (H115: £3.5m) due to FX and £0.5m of legal provisions. Unchanged consensus forecasts suggest that FY16 is something of a profits plateau (forecast EBITDA of £9.4m, up 1%). However, with new product releases weighted to H216, FY17e EBITDA growth of 14% looks very achievable. Higher working capital left end-H116 net cash at £4.0m (£6.2m at end-FY15), but this is expected to increase to £5.5m by end-August 2016.
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