- Industry-wide surplus stifles Content Creation demand
- Gross margin up as freight costs contract
It’s difficult to gauge the extent to which the deteriorating economic outlook would impact sales of proprietary hardware and software audio products. Judging by Focusrite’s (TUNE) half-year figures, demand for its specialist product offering isn’t immune to wider cyclical influences – or one-off events for that matter.
Indeed, demand for its Content Creation product grew at an unprecedented rate when live events were curtailed during the pandemic, whereas revenues at the audio reproduction division dried up. Demand linked to the former division has softened during the period under review, contracting by 16.1 per cent and leading to an overall fall in the group total. Yet both business units are experiencing customer demand ahead of pre-pandemic levels.
Performance has been supported by the launch of 21 new product lines, while supply chain challenges have eased, not least due to the acquisition of Linea Research in March 2022. Effective cost pass-through initiatives and an intensified focus on logistics and routes to market contributed to a 50 basis point increase in the gross margin to 47.1 per cent, although the pronounced decrease in freight costs was probably the most significant factor behind the improvement.
The group has moved from a net cash position in February to a net debt position of £13.2mn due to acquisition costs and a near-doubling in inventory levels “during a period of key product transitions”.
The shares slumped on release of the interim numbers, as the market digested a 19 per cent fall in revenue on an adjusted constant currency basis, while cash profits decreased by 18 per cent to £18.1mn. The shares now trade below the long-term average at a modest 11 times consensus earnings. We anticipate that the industry-wide surplus that negatively impacted Content Creation will ease over the coming months, but we remain circumspect regarding near-term prospects. Hold.
Last IC view: Hold, 795p, 8 Dec 2022
| FOCUSRITE (TUNE) | ||||
| ORD PRICE: | 514p | MARKET VALUE: | £304mn | |
| TOUCH: | 510-540p | 12-MONTH HIGH: | 1,220p | LOW: 511p |
| DIVIDEND YIELD: | 1.2% | PE RATIO: | 15 | |
| NET ASSET VALUE: | 187p* | NET DEBT: | 12% | |
| Half-year to 28 Feb | Turnover (£mn) | Pre-tax profit (£mn) | Earnings per share (p) | Dividend per share (p) |
| 2022 | 92.9 | 16.5 | 23.1 | 1.85 |
| 2023 | 86.2 | 10.9 | 14.4 | 2.10 |
| % change | -7 | -34 | -38 | +14 |
| Ex-div: | 12 May | |||
| Payment: | 10 Jun | |||
| *Includes £84.3mn of intangible assets, or 142p a share | ||||
