Focusrite — Another sensible acquisition

Focusrite — Another sensible acquisition

Focusrite has announced its largest ever acquisition, Martin Audio, for c £35.2m net, following the announcement of the acquisition of ADAM Audio in July 2019 for £16.2m. The acquisition diversifies Focusrite into a complementary market that is growing, is profitable and cash generative. The AGM trading statement indicates that Q1 trading is line with expectations. Our forecasts remain unchanged until the acquisition, stated to be earnings accretive by management, completes.

Russell Pointon

Written by

Russell Pointon

Director of Content, Consumer and Media

Focusrite

Another sensible acquisition

Acquisition and AGM

Consumer electricals

20 December 2019

Price

613p

Market cap

£356m

Net cash (£m) as at 31 August 2019

14.9

Shares in issue

58.1m

Free float

60%

Code

TUNE

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

Business description

Focusrite is a global music and audio products group supplying hardware and software used by professional and amateur musicians, which enables the high-quality production of music.

Analysts

Russell Pointon

+44 (0)20 3077 5757

Neil Shah

+44 (0)20 3077 5700

Focusrite is a research client of Edison Investment Research Limited

Focusrite has announced its largest ever acquisition, Martin Audio, for c £35.2m net, following the announcement of the acquisition of ADAM Audio in July 2019 for £16.2m. The acquisition diversifies Focusrite into a complementary market that is growing, is profitable and cash generative. The AGM trading statement indicates that Q1 trading is line with expectations. Our forecasts remain unchanged until the acquisition, stated to be earnings accretive by management, completes.

Year end

Revenue
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

08/18

75.1

11.3

17.6

3.3

34.8

0.5

08/19

84.7

13.8

21.4

3.8

28.6

0.6

08/20e

95.6

14.2

21.7

3.9

28.2

0.6

08/21e

99.0

14.4

21.9

4.0

28.0

0.7

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Focusrite has announced its largest acquisition and second acquisition in 2019, Martin Audio, from private equity, for a net consideration of c £35.2m (gross £39.2m less cash £4.0m), which will be immediately earnings enhancing. Martin Audio designs and manufactures high-performance loudspeaker systems for touring; therefore, it will diversify Focusrite away from recording and enhance the potential customer base. The live performance market is experiencing good growth. Geographically, Martin is located close to Focusrite, therefore this will enable a greater level of sharing of expertise and, importantly, key management that has led Martin’s turnaround will be retained. For the 12 months to October 2019, Martin’s revenue was £24.4m and EBITDA was £3.4m, therefore the acquisition multiples are 1.4x sales and 10.4x EBITDA. Martin’s EBITDA margin of 13.9% compares to Focusrite’s 20.3% (FY19).

Focusrite has also announced a first quarter FY20 trading statement for the AGM. Revenue growth is ahead of the prior year, helped by the acquisition of ADAM Audio, which is trading in line with expectations. Elsewhere, total revenue is below last year, due to the strength of sterling and a one-off in the comparative period. We retain our underlying existing forecasts; however, we will review them on completion of the acquisition of Martin at the end of December 2019.

General disclaimer and copyright

This report has been commissioned by Focusrite and prepared and issued by Edison, in consideration of a fee payable by Focusrite. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

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United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Focusrite and prepared and issued by Edison, in consideration of a fee payable by Focusrite. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Studio Retail Group — A fine development

Studio’s interim results and current trading statement indicate improving momentum and profitability across the majority of the businesses, highlighting that the shift to digital is improving the growth outlook. The planned disposal of the Education business should lead to higher growth rates for revenue and higher profitability for the remaining business. We upgrade our FY20 PBT estimate by 2% to take account of the improved gross margin performance, which leads to our DCF-based valuation increasing to 450p.

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