We "make music making easy" says Phil Dudderidge, chairman and major shareholder of Focusrite (TUNE) - a unique proposition on Aim that has impressed us since its IPO in 2014. Mr Dudderidge, the former sound technician for Led Zeppelin, founded the company in 1989 to provide high-quality music recording and production equipment for all music producers - professionals to bedroom musicians. This niche market is growing at quite a rate thanks largely to recent shifts in the way music is made, and Focusrite's brands have dominant positions with products covering the spectrum of price points.
- Leading brands and new product launches
- Exposed to niche growth market
- Net cash
- Attractive rating
- Wide bid-offer spread
- Inventory build-up
The company owns two brands (Focusrite and Novation) and frequently launches new products. For example, Circuit, a "grid-based groove-box" for the production of digital music, was launched in September 2015 and helped to boost Novation revenue 7 per cent in the first half. In April of this year the company also started selling its new high-end range: the Red series. These products aimed at pros could also drive significant growth, have been widely acclaimed by trade media.
Several existing products also continued to perform well, however, other ranges saw a drop-off in sales as the group wound them down to make way for new launches. Although Mr Dudderidge wasn't giving any clues as to the nature of these new products, speaking to him following the interim results announcement, his excitement was palpable.
It is perhaps this sort of atmosphere that has resulted in Focusrite's fifth consecutive year on the Sunday Times list of top 100 best small companies to work for. No stranger to awards, the company has also recently won the Queens Award for Enterprise in the category of international trade.
While the US is the biggest single market for Focusrite accounting for 47 per cent of sales, its 7 per cent first-half revenue growth was outdone by the 30 per cent achieved by the rest of the world division, which accounts for 18 per cent of the total, as sales in the Asian markets really took off. Sales in Europe - 35 per cent of the group - also experienced some growth, but were hampered by the weak euro, in spite of hedging. As 27 per cent of revenue but very few costs are denominated in euros, this also dragged on profitability.
New product launches have been tying up cash in both stock and improved credit terms being offered to US distributors - Focusrite uses a third-party sales model across the pond. But if new products gain traction, this drain on cash to support launches should reverse. The company still ended its first half with £4m net cash, down from £4.7m a year earlier, which coupled with the group's five-year £10m revolving credit facility means acquisitions are a possibility.
FOCUSRITE (TUNE) | ||||
|---|---|---|---|---|
| ORD PRICE: | 160p | MARKET VALUE: | £85m | |
| TOUCH: | 158-162p | 12-MONTH HIGH: | 190p | 144p |
| DIVIDEND YIELD: | 1.3% | PE RATIO: | 15 | |
| NET ASSET VALUE: | 38p | NET CASH: | £4m | |
| Year to 31 Aug | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2014 | 41.0 | 6.5 | 10.1 | na |
| 2015 | 48.0 | 7.2 | 10.5 | 1.8 |
| 2016* | 53.5 | 6.7 | 9.4 | 1.9 |
| 2017* | 58.8 | 7.7 | 10.6 | 2.0 |
| % change | +10 | +24 | +21 | +5 |
Normal market size: 2,000 Matched bargain trading Beta: 0.35 *Panmure Gordon forecasts, adjusted PTP and EPS figures | ||||
