Focusrite hit by volatile cost environment

Focusrite (TUNE) grew headline sales with the help of the integration of acquisitions and the post-pandemic rebound in live events, but pushed pre-tax profits and gross margin (which fell by 310 basis points to 45.3 per cent) in the wrong direction. The market marked down the shares by 9 per cent as a result, despite the music and audio products company bumping up the dividend.

Chief executive Tim Carroll told Investors’ Chronicle that high freight and component costs had hit the business. But “availability and visibility” is now getting better, he added, and freight costs are coming down though component prices remain elevated. Encouragingly, the business isn't exposed to high energy costs due to its operational model, with mass production taking place in China and Malaysia.

Component supply, along with other factors such as product launches and a strong dollar, meant that this was a tale of two halves when it came to top-line performance. Sales were up 16 per cent in the second half against last year, after a 3 per cent contraction in the first. And it was very much a mixed divisional picture. Acquisitions helped Martin Audio and Sequential sales boom by 56 per cent and 206 per cent respectively. But sales at the main revenue driver, the eponymous Focusrite, fell, as they did at Novation and Adam Audio.

Investec analysts said that “with its growing stable of brands and global reach, there is a strong platform to deliver long-term growth with increasing cash generation”. The investment bank values the shares at 20 times forward 2023 earnings, significantly below the 5-year average of 27 times according to FactSet. Hold.

Last IC view: Hold, 1,125p, 26 Apr 2022