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magazineThe next big exciting small cap growth story
Tune into the increasingly sweet-sounding growth story offered by Focusrite (TUNE:AIM) at 263p.
Forecast-busting half year figures (3 May) and a confident outlook suggest scope for additional earnings upgrades from this high margin, strong cash generator at the forefront of technology developments.
Focusrite is a market leading music and audio technology company supplying hardware and software to professional and amateur musicians.
It trades under two established brands; audio recording equipment brand Focusrite and Novation, a specialist in hardware and software for creating and playing electronic music.
Differentiation, not price
‘We don’t compete on price, we compete on differentiation,’ says enthusiastic new CEO and former professional musician Tim Carroll.
Focusrite’s products and solutions are gaining traction with consumers around the globe and levels of repeat business with customers are building.
Half year results revealed sales up 23.7% to £32m, growth delivered in all major geographic regions with the US a stand-out performer and China growing strongly. Pre-tax profit powered 89.1% higher to £4.6m.
Focusrite is expanding its Focusrite and Novation brand ranges with innovative products.
These exciting wares include the second-generation Scarlett USB audio interface range, which has rapidly become the world’s best-selling interface. RedNet products are penetrating the live sound and broadcast business-to-business market; and the Launchpad grid instrument, which is aimed at younger musicians and whose growth potential has been amplified by distribution via Amazon.
A big noise
We see Focusrite sustaining this heady growth momentum given its unwavering investment in product innovation and scope to enter new markets.
The £153.9m cap continues to invest 6% to 7% of revenue on product development.
At the half year, Focusrite reported a £9.4m net cash pile. This solid balance sheet gives Focusrite the firepower to grow organically, with Carroll also scouting for acquisitions. Dividends were increased by 15% to 0.75p.
For the year to August 2017, Panmure Gordon forecasts pre-tax profit of £10.8m (2016: £9.2m), rising to £11.9m by 2018.
Based on this year’s 12.6p (2016: 11.4p) earnings estimate, Focusrite’s prospective price to earnings PE ratio of 21 times is punchy. But given the global market share gains Focusrite is making, we’re staying positive, particularly as forecasts are conservatively pitched.
A compelling growth story stock with a healthy private investor following, Focusrite has a record of under-promising and over-delivering. Buy at 263p.
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