Focusrite has delivered an outstanding first half with substantial growth on all metrics, across all territories and in both product brand groups. Constant currency revenue growth of 26% is double that of FY17 although, after an unprecedented pre-Christmas period, it is possible that the shape of trading may be becoming more seasonal. The company has net cash of c £20m, and the share price appears to discount a return on that.
A clean set of H1 results shows consistent and substantial organic growth across the business. Revenue, at £38.8m, beat pre-close guidance of £38.0m, growing by 21.2% y-o-y, with sterling strength masking 26% constant currency revenue growth, twice what it was in FY17. EBITDA grew by 30.0% and operating profit by 36.3%. Operating margin improved from 14.3% to 16.0%, driving 27% growth in pre-tax profit. Net cash has grown since year end by £5.6m to £19.7m.
Like many much larger companies, Focusrite has a largely international market, with c 85% of revenues outside the UK. Regionally, constant currency growth is in impressive double figures across the board, with the lowest region being 19% in Europe, Africa and the Middle East. Here all the major territories (UK, Germany and mainland Europe) were in solid growth. By division, there has also been consistent growth, with Focusrite division growing revenue at 23% and Novation by 19%.
It is possible that first-half strength may reflect a change in the seasonal shape of sales. In the light of that possibility we carry forward the H1 revenue beat of £0.8m (compared with the March trading statement), resulting in a 4.5% improvement at PBT level for FY18e. We cautiously leave our expectation for H2 effectively unchanged. If our caution is unnecessary, there should be further upside to our FY18 forecast. For FY19e we upgrade our PBT forecast by 3.5%.
On a DCF basis, the current share price is equivalent to a medium-term organic growth rate of about 12%. On a peer group comparison, the picture is mixed: the shares trade at a 1% P/E discount for FY18e but a 31% premium for FY19e, and an EV/EBITDA premium of 23% for FY18e and 34% for FY19e. The missing element is excess cash, where the market appears to be discounting investment of the net cash balance at a c 15% return.