Focusrite’s revenue has been driven by acquisitions against a period of tough comparatives for the core brands. Current trading looks more encouraging for the majority of the brands, which is leading to gross margin improvements and a better outlook for EBITDA margin. We upgrade EBITDA forecasts for FY20e and FY21e by c 7%, but a higher tax rate in FY21 limits EPS upgrades in that year. For FY20e, an EV/EBITDA of 15.4x and a P/E of 24.9x are above long-term averages.
Headline figures for revenue (23.5% growth), including the performance of the recent acquisitions, and the improved net debt position (£19.9m) had already been reported at the trading statement in March. The full results statement highlights a strong gross margin performance, which appears sustainable. The lower EBITDA margin of 18.3% in H120 versus 22.0% in H119 partly reflects the impact of acquisitions as expected. The current trading statement has a positive tone, with ‘record levels of product registrations’, and e-commerce fulfilling demand despite retail outlets being closed in many countries. The company has deferred the decision on the announcement of the interim dividend for FY20 given the economic uncertainty due to COVID-19.
We upgrade our revenue forecasts for FY20 and FY21 by 2–3%, which reflects expectations of higher growth for the non-Martin businesses, offset by a modest decline for Martin Audio given the weaker outlook for live entertainment due to COVID-19. Changes in mix, improved sourcing benefits and better management of discounts,etc, lead to gross margin improvements of 100bp+ in FY20e and FY21e. Our PBT forecasts increase by 7–10% but a higher tax rate due to the company’s increasing scale and less-favourable tax treatment of development spend, etc, ensures that our forecast for EPS in FY21 is broadly unchanged. We make no change to our dividend forecasts.
Since the year-end trading statement, the share price has increased, and when coupled with our upgrades, the EV/EBITDA multiples have re-rated modestly to 15.4x for FY20e and 14.5x for FY21e, versus an average since IPO of 11.1x. The P/E multiples for FY20e and FY21e are 24.9x and 24.6x, respectively, versus the average since IPO of 17.8x.