Growth in revenue and cash is strong after four months of trading. Focusrite continues to build on its leadership positions in international markets, and to benefit from its c 85% non-UK market exposure. Further growth in cash is also encouraging as it suggests good profit conversion despite expected cost increases. If these independent growth trends continue to the half-year, we would see upside risk to our forecasts.
In November management reported that revenue and cash had grown “further” since the August year end, with “strong” market acceptance of the expanding portfolio. Now, the growth itself is described as “strong”, and it has moreover continued through November and December. The word ‘strong’ (which was also used about FY17’s constant currency growth of 13%) indicates a firming position, as well as the fact that the four months to December are a more significant period.
Focusrite derives c 85% of revenue from non-UK sources, positioning it well in structurally sound international markets such as the US and Far East. We understand that trends seen in FY17 have broadly continued. Those were, firstly, growth in all geographies, but led by the US and Rest of World (mainly Asia), and secondly growth in both divisions, led by Novation. Focusrite continues to build its leading international positions in its specialised markets of audio interfaces and sound generation.
Revenue growth comparable with FY17’s constant currency growth of 13.5% would be above our FY18 revenue forecast of 10% (constant currency: 8%). We already forecast cost increases on the two new brand groups Focusrite Pro and Ampify (see our Outlook note), as well as in e-commerce. However, strong growth in cash also suggests good profit conversion despite higher costs. We therefore retain added confidence in our forecast, with upside risk if these trends continue to the half year.
As we are not changing our forecast, we retain our DCF valuation of 363p/share for now. This would put the shares on an FY18e P/E of 23.7x and EV/EBITDA of 14.2x. We include in our valuation year-end cash of £14.2m reported at the August year end, although cash is also reported as having grown strongly. The use of that cash could also be supportive of the valuation.