Focusrite: Investment First Look

Focusrite is a music equipment maker. It helps professional and amateur musicians around the world.

Although listed on AIM in December 2014, it has over 20 years of creating quality equipment for the music industry.

Focusrite has two divisions: –

The Focusrite brand that makes up 66% of group revenue and the Novation brand, which makes up for the rest.

Regarding geographic location, half the revenue is generated in America.

 

You can check what the company sells HERE (for Focusrite) and HERE (for Novation)

 

Focusrite Interims

Today, the update is strong with revenue rising to £32m (HY16: £25.9m, HY15: £23.8m and HY14: £20.2m.)

Meanwhile, operating profits rose to £4.6m (HY16: £3.2m, HY15: £2.96m and HY14: £2.97m.)

 

Focusrite has no debt and seems to reduce its payables to £6.4m from £8.7m, while receivables are steady.

A positive sign is the cash build-up being their highest level since listing. The cash pattern from interim to full-year looks like this:

Focusrite cash balance change

 

Now, cash represents 23% of total assets. If business continues to prosper without any acquisitions, then the cash balance should break £10m by year-end.

The equity to shareholders stands at £28.6m.

Onto the cash flow.

Net cash earnings came in higher at £6m, compared to net profit of £4m, despite reducing payables by £2.2m.

An increase in dividends of 15% been announced to shareholders.

The next session looks at Focusrite previous annual results with some foresight to 2017’s full-year.

 

Brief Financial Statements review

In the balance sheet, the asset-side looks topsy-turvy. I met that the firm is short-term asset focus rather than long-term.

It has no debts as shareholders’ equity rose steadily from £8.56m to £24m. (Expect that to reach £30m in 2017)

Dividends paid totalled less than £1m in 2016, though it was up from £314k. But, in 2014 Focusrite paid £4.24m. Is that by coincidence?

Before the IPO, Focusrite paid dividends of £537k in 2012 and £1m in 2013.

So, it’s likely that Focusrite paid the big dividends to attract investors.

Are there some areas of concern?

Despite rising net profit, the business has volatile net cash earnings. (see orange line)

Focusrite net cash earnings

Now, from this year interims, net cash profit is likely to bounce back and might break 2014 record. (I expect it to surpass £10m.)

 

 

Focusrite’s share price

The placing was 126 pence per share. It raised net proceeds of £21.9m from 17.8m shares with total share outstanding of 58.1m. Market Capitalization is £73.2m.

Since then, the shares trade at 239 pence per share, putting the business on £140m.

Full-year earnings could top £9m-10m because of this:

Focusrite net earnings

Focusrite sees slightly more business in the second-half of the year.

 

Final Assessment

As this is an investment first look, am not putting a buy or sell because it requires further research and analysis.

But, given it has over 20-year experience, then it warrants further assessment. A forward-PE of 14 to 16 times. Add in the fact that Earnings per share in the past five years compounded by 17%. And, with the latest EPS rising by 84%, then we need to investigate if it’s has a sustainable business model.

Despite, their technical know-hows of making quality equipment. Some of the demand is helped by reality TV shows such as the X-Factor, American Idol and others.

There is no evidence of any correlation between these two factors, but it possible. Another medium outlet is Youtube. You have people singing and playing musical instruments to attract views and subscribers.

 

Verdict: – Further research is warranted.

 

What are your depth thoughts on Focusrite?

Is this a good growth company with clear competitive advantages?

Finally, if you like this post, please share, like and subscribe for new posts.

 

Disclosure

The opinions expressed by the writer is for entertainment and research purposes. It does not constitute professional investment advice. Data is correct on available information at the time.

Finally, the writer does not own the company’s stock, unless stated otherwise.