Focusrite has reported solid H119 revenue growth, reflecting particularly strong performance in Europe and for its Focusrite ranges globally. We leave forecasts unchanged, recognising the macroeconomic challenges in H2 arising from US tariffs and Brexit. The company is actively seeking opportunities to use its substantial net cash balance (H119: £26.2m), as reflected in the current valuation.
Focusrite has delivered solid H119 revenue growth of c3% to c£40m, with a particularly strong performance in Europe. Sales of the second-generation Scarlett, launched in June 2016 remained robust over the period, offsetting weaker demand for the Novation ranges, most notably Launchpad, which is approaching four years since launch. Cash conversion remained positive and net cash increased by £3.4m to £26.2m at the end of the period. The company continues to invest in the pipeline and has flagged two major new product launches, scheduled for summer and autumn 2019.
Despite delivering a solid H119 trading performance, we cautiously leave our FY19 forecasts unchanged. We recognise the potential macroeconomic challenges in H2, if US tariffs are eventually raised from 10% to 25% (as previously scheduled for 1 March 2019) and from the outcome of Brexit. Focusrite passed on the initial tariff to US customers when introduced last October, with limited impact on demand for most products. However, any further material price increases would be more likely to have a meaningful impact on consumer demand. We modelled sensitivities to both tariffs and Brexit in our November note.
The share price has appreciated 10% since our last note in December, outperforming the FTSE All Share by c 3%. Then it was broadly equivalent to our DCF, assuming 10% revenue growth for five years beyond our forecast, fading to 2% in perpetuity, with terminal EBITDA margin of 21% and cost of capital of 8.4%. However, it did not reflect the potential return on investment of Focusrite’s excess cash. That has now changed and we calculate the current share price factors in utilisation of that cash, at an attractive long-run post-tax ROCE of c 13%.