Berenberg initiates coverage on Focusrite at 'buy'

Analysts at Berenberg initiated coverage on audio-products company Focusrite with a 'buy' rating and 1,100.0p target price on Thursday, citing a number of near-term tailwinds and M&A optionality.

Berenberg said Focusrite had differentiated itself in recent years to address the content-creation and sound-reproduction markets, servicing both amateurs and professionals, which differentiated it from competitors who tend to specialise in niches.

"This has allowed the business to grow at almost twice the pace of the overall market. With a total addressable market of circa £5.0bn, we believe there is plenty of headroom for Focusrite to continue taking market share, even in a more challenging macroeconomic environment," said Berenberg.

The German bank pointed out that near-term headwinds that affected the group in 2022, including supply chain pressures, spiralling freight costs, and component shortages, resulted in a 240 basis point reduction in gross margin. However, in 2023, Berenberg expects these headwinds to reverse, to the benefit of both the top line and gross margin.

Berenberg also highlighted that with a £40.0m revolving credit facility, the business was well placed to undertake further M&A, with acquisitions likely to remain "a key driver of growth".

"At present, the shares trade close to one-third of their peak valuation, despite significant tailwinds this fiscal year. We believe that, as the company demonstrates its earnings power and resilience, this multiple will move upwards," said Berenberg.

Reporting by Iain Gilbert at Sharecast.com