Focusrite has announced the €18.0m strategic acquisition of ADAM Audio, a leading German developer and global distributor of professional studio monitor loudspeakers, funded entirely from existing cash resources. Although continuing to operate as an autonomous subsidiary, we see clear opportunities to cross-sell to Focusrite’s global customer base of amateur and professional music markers and to leverage its distribution network. We increase our forecast FY20e PBT by 5% to £13.3m and raise our DCF-based valuation to 530p per share (previously 471p).
Focusrite has acquired Pro Audio, the holding company for ADAM Audio and its subsidiaries (ADAM) for a cash consideration of €18.0m (£16.2m), representing 1.4x price/sales and 18x price/earnings multiples for 2018. In the year to 31 December 2018, ADAM delivered sales of €12.9m, adj. EBITDA of €1.7m and PBT of €1.0m. Net assets at 31 December 2018 were €4.1m, mainly comprising high quality stock. After the acquisition Focusrite expects to have net cash of c £12m.
ADAM places great emphasis on product design and innovation and its ranges, including the recently launched more affordable T-Series, the all-rounder professional AX-Series and flagship S-Series, are well aligned to Focusrite’s existing customer base. Although management intends for ADAM to continue operating autonomously as a subsidiary with standalone offices in Germany, the US and China, there are clear opportunities for cross-selling and to leverage Focusrite’s global distribution network.
We forecast ADAM’s revenue to grow modestly by 3% y-o-y and assume margins remain stable. In FY19e we factor in 1.5 months of ADAM’s sterling equivalent revenue and earnings, resulting in a modest PBT increase. In FY20e we factor in a full year of ADAM’s revenue and earnings, offset by the cautious assumption that Focusrite’s current distribution of third-party studio monitors ceases (c £3m of revenue). We increase our FY20 PBT forecast by 5% to £13.3m.
Based on conservative growth assumptions for ADAM, our DCF-based valuation increases to 530p per share (vs 471p), slightly ahead of the current share price. We expect to gain greater visibility on growth prospects when the company reports FY19 results.