Shares in Focusright (LSE: TUNE) received a big boost earlier today as the music and audio products business announced a very positive set of interim results for the six months ended 28 February. By late afternoon the shares were already up by more than 10%, having reached all-time highs of 246p earlier in the day. But with the share price having soared 95% since its December 2014 IPO, is it too late to join the party?
Led Zeppelin
Researching some of the smaller AIM-listed companies can often be tricky as analysts’ coverage tends to be confined to the ‘house broker’, and hence earnings forecasts should be taken with a pinch of salt. Nevertheless, London’s junior market can often throw up hidden gems waiting to be discovered. But does Focusrite fit into that category?
First we need to fully understand what the company actually does, and how it intends to achieve future growth. It describes itself as a global music and technology group, supplying hardware and software solutions to musicians and sound professionals. Indeed, its Executive Chairman, Philip Dudderidge, was Led Zeppelin’s first live soundman in 1970. How cool is that?
Global presence
The business has two established and growing brands. The Focusrite brand makes audio interface and other products for audio recording musicians, while its Novation brand allows customers to make electronic music using synthesisers and computer-enabled technology.
The High Wycombe-based firm’s tiny market value of £140m may seem small, but it has truly global presence, with an international distribution network covering approximately 160 territories, and marketing subsidiaries in Los Angeles, the US and Hong Kong.
Currency tailwinds
Today’s results showed a 23.7% rise in half-year revenues to £32m, compared to £25.9m for the same period a year earlier, with operating profits up by £1.4m to £4.6m. Adjusted earnings (before interest, tax, depreciation, and amortisation) came in 27% higher at £6.1m, compared to £4.8m for the first six months of FY2016. This was aided by a particularly strong performance in the group’s Novation business, as well as continued growth of its second generation Scarlett USB audio interface range.
Admittedly, the strong figures were helped along by favourable currency trends, but nevertheless revenue growth accelerated further on a constant currency basis during the period to 12%, compared to 7.5% for the same period a year earlier. I’m particularly encouraged by the revelation that sales growth was achieved in all geographical regions, but most notably in its largest market, the US, and by an impressive 25% on a constant currency basis.
Research & Development
Yet I’m not just impressed by the strong financials, but by the way Focusrite hopes to achieve continued growth in the years ahead. Research and development seems to be the key driving force, with no fewer than six new products launched during the six-month period across a range of price points and market segments.
There’s no doubt in my mind that this is an exceptional business with excellent prospects for continued growth, but after rising 78% since July, the shares are looking overbought at 20 times full-year earnings for FY2017. I would wait for a better entry point.
