Focusrite has issued a reassuring trading update for H120. Sales growth is in line with expectations, against a tough comparative. With the majority of sourcing from Asia, there had been fears about its ability to continue sourcing product to satisfy consumer demand, which still looks ‘buoyant’, but deliveries have resumed quickly. Our underlying forecasts are unchanged, but we incorporate the acquisition of Martin Audio, leading to EPS upgrades of 1% for FY20 and 7% for FY21. The recent de-rating has brought multiples back towards historic averages: EV/EBITDA for FY20e of 12.2x (average of 11.1x) and P/E for FY20e of 19.5x (average of 17.8x).
The trading update for H120 indicates that revenue has grown by c 24% to c £50m. The acquisitions of ADAM Audio and Martin Audio contributed c £12m, and therefore underlying revenue for the core Focusrite business reduced by 6%, to £38m. This is against a tough comparative when it benefited from tariff-related price increases in the US. In addition, orders for £2m, which could not be fulfilled during H120 due the impact of COVID-19, will fall into H220. Cash generation has been positive: net debt of c £20m compares with c £25m post the acquisition of Martin Audio at the end of December 2019. The announcement that Jeremy Wilson, CFO since the IPO in 2014, will leave by the end of CY20, should ensure a smooth handover.
We leave our underlying forecasts for FY20 unchanged. At present, demand continues to look encouraging; management points to ‘buoyant’ demand but the outbreak of COVID-19 could have both a positive and negative influence on supply and demand. On the positive side, enforced isolation could increase demand as musicians and hobbyists have more time to devote to music. On the negative side, fulfilment of orders from online retailers etc could be more challenging, halting the live performance market could negatively affect demand and there could be further supply disruptions from sourcing. Shipping from Asia to Europe and the US takes c four weeks. We now incorporate the acquisition of Martin Audio into our forecasts for FY20 and FY21. Our FY20 EPS forecast increases by 1% to 21.9p from 21.7p, and our FY21 EPS forecast increases by 7% to 23.5p from 21.9p.
On our new forecasts, the EV/EBITDA multiples for FY20e and FY21e are 12.2x and 11.7x respectively versus an average since IPO of 11.1x. The P/E multiples for FY20e and FY21e are 19.5x and 18.2x versus the average since the IPO of 17.8x.