Good morning! We should be back up to full strength again today, with Paul & Roland on duty.
Roland's Section:
Loungers (LON:LGRS) - this bar / cafe operator has reported full-year sales and profitability ahead of consensus forecasts for the year ended 17 April. I’m impressed by the quality of this operation and its growth ambitions, but I’m wary of the impact of rising costs and capex.
Corero Network Security (LON:CNS) - this cybersecurity firm has reported a maiden profit. I think it may finally be starting to deliver on its potential, supported by favourable market dynamics. I’d want to do further research, but I’m definitely encouraged by today’s numbers.
Focusrite (LON:TUNE) - I think this musical equipment supplier has delivered a solid set of half-year results in somewhat trying circumstances. Although I expect more measured growth in the future, I remain a fan and do not think the current valuation is excessive.
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Roland’s section
Loungers (LON:LGRS)
Share price: 257p (+4% at 08.30)
Shares in issue: 102.7m
Market cap: £253m
“Record sales for the 52 weeks ended 17 April 2022”
Loungers is a fast-growing cafe / bar operator with two brands, Cosy Club and Lounge. Both formats are all-day offerings that appeal to a wide range of customers. The business is highly-rated by us here at the SCVR. While the shares don’t look cheap, they have pulled back a little this year.
Today’s update reports continued strong trading and confirms the group’s roll-out of new venues is continuing at pace.
Financial highlights: Loungers’ financial year ended on 17 April, so this is a year-end trading update.
- Record full-year revenue of £237.3m, ahead of £226m consensus estimates
- Full-year profitability expected to be slightly ahead of market expectations
- Net debt ex-IFRS 16 was £2.6m at year end (April 2021: £47.5m)
It would have been helpful if Loungers could have quantified the expected change in profitability. We’ll have to wait until results day on 13 July for this information, now, making it harder to gauge any possible early impact from wage and input cost inflation.
Trading: Management say that although Omicron caused subdued trading in December, activity has bounced back very strongly since then.
Like-for-like sales rose by 22.1% during the 48 weeks to 17 April 2022 and “rebounded convincingly post-Christmas”, as the Omicron surge eased.
However, one-year like-for-like comparisons will inevitably be favourable, given the pandemic restrictions that existed a year ago. To provide more colour on performance, Loungers has provided two-year and three-year LFL figures.
Rather than type these out in full, I’ve included a screenshot below from today’s update. I’ve circled the numbers which seem most relevant to me:
New openings: Loungers opened a record 27 new sites over the last year, comprising 26 Lounges and one Cosy Club. This takes the group’s portfolio to 195 sites. The company says it’s “very pleased with the strength of these openings”.
Jack reviewed Loungers in December, when he noted the company was thinking about increasing its roll-out rate to 30-35 units per year, with an eventual target of c.500 locations.
My view: I’ve been consistently impressed with Loungers and today’s update does nothing to change this view. This group appears to be one of the best operators in the bar/cafe sectors and its expansion targets suggest the business could double in size again.
Pre-pandemic profitability was quite good for a business of this kind, with a FY19 operating margin of 8.3% (the equivalent figure for J D Wetherspoon (LON:JDW) was 6.9%).
Today’s update did not include an updated outlook statement for the year ahead. Nor was there any mention of costs or margins.
However, I’m struck by the caution implied by consensus forecasts ahead of today’s update. These suggest a 34% drop in adjusted earnings in FY23, despite continued revenue growth.
This puts Loungers on a forecast P/E of 25 for the year ahead. I’d argue that’s quite full for a fairly low margin, high capex business.
My reading of the consensus view is that analysts expect Loungers to absorb higher costs where possible, in order to limit price increases. This outlook may also reflect the impact of a return to higher rates of capex in 2022/3, as expansion accelerates.
Interestingly, forecasts I’ve seen for FY24 also show Loungers profits remaining below FY22 levels, despite continuing top-line growth.
On a short-term view, I think Loungers shares are probably up with events. But on a longer view, I suspect the stock could still offer significant upside if it can maintain its growth rate and fend off growing competition.
Corero Network Security (LON:CNS)
Share price: 14.7p (+10% at 08.45)
Shares in issue: 494.8m
Market cap: £73.6m
“Record performance, strong customer traction and maiden profit”
Cybersecurity specialist Corero Network Security is one of this morning’s top movers, up by around 10% at the time of writing. This business provides products and services to protect clients’ systems from distributed denial of service (DDoS) attacks.
DDoS attacks involve bombarding online services with requests so that they run out of resources and crash, or become unavailable. They’re one of the more common forms of cyber attack.
Corero has been a jam tomorrow stock for a long time. Shareholders have suffered significant dilution. But the company’s latest results do suggest to me that this business may be turning a corner in terms of both growth and profitability.
Today’s numbers include the company’s first ever post-tax profit and evidence of substantial revenue growth. Let’s take a look.
Financial highlights: Today’s results are billed as being ahead of expectations, but in fact upgraded EBITDA guidance was announced to the market in January.
However, consensus estimates were still showing a full-year loss for 2021, when in fact Corero has reported a profit. This may explain some of the share price movement we’ve seen this morning.
Here are the main numbers:
- Revenue +24% to $20.9m
- Annualised Recurring Revenue (ARR) +31% to $12.8m
- Gross margin: 85% (2020: 77%)
- EBITDA: $4bn (2020: EBITDA loss of $1.4m)
- Pre-tax profit: $1.4m (2020: pre-tax loss of $4.0m)
- Earnings per share: 0.3 cents (2020: loss of 0.8 cents)
- Net cash: $8.4m (2020: $7.6m)
These numbers certainly appear to represent a potential transformation for the group. Strong growth in recurring revenue is particularly encouraging, in my view.
Operational highlights: Corero says it has made significant operational progress with sales and marketing initiatives, alongside working with its established partners.
- Secured 44 new customers (2020: 42), adding six new countries. Now active in 47 countries. Significant traction in key markets such as hosting and SaaS Enterprise segments.
- Growth supported by structural growth in the DDoS mitigation marketplace. Corero estimates that its “serviceable addressable market” could reach $715m by 2026.
- Continued digitisation and awareness is driving global demand for such services.
- ARR growth should underpin future earnings
Profitability: Last year’s gross margin of 85% seems impressive and suggests to me that this business could become highly profitable if it can continue to scale.
Corero’s profitability has been gradually improving for a number of years:
Todays’ results continue this trend with an operating margin of 5%.
Happily, profitability does not seem to have been boosted by the capitalisation of development spending. Although Corero does capitalise some development spend, this was offset almost exactly by a corresponding amortisation charge last year.
We can see from the balance sheet that the overall figure remained largely unchanged in 2021:
Balance sheet/cash flow: My sums suggest Corero generated just $269k of free cash flow last year after finance costs, due to some large working capital movements.
However, underlying operating cash generation improved and the group’s year-end net cash position of $8.4m looks safe enough to me, assuming the business remains cash generative.
Although dilution has been dire in the past, I would hope that further share issuance will be minimal:
I would imagine that chairman Jens Montanana, who controls a 38% stake, will also be keen to preserve the value of his equity going forward.
Outlook: Corero’s outlook commentary is unsurprisingly positive. The company’s sales pipeline and new business momentum are said to be at record levels.
Meanwhile, exposure to Russia and Ukraine is said to be “very limited” and is expected to have “little direct impact on Corero”.
The board says it’s confident in Corero’s medium- to long-term growth prospects, but doesn’t mention the 2022 outlook explicitly. I wonder why?
My view: Corero’s valuation is still pricing in significant growth. But it does not look especially outlandish to me.
Based on today’s results and share price, I estimate the following multiples:
- Trailing P/E: 62
- Price/sales: 4.3
- EV/EBITDA: 16
The current valuation is clearly pricing in significant further growth. But if Corero can maintain the combination of growth and profitability it’s shown in 2021, then I think the stock could grow into this valuation on a medium-term view.
It’s worth remembering the potential impact of operating leverage to boost future profits. If fixed costs remain controlled while sales rise, then the marginal cost of sales is quite low. This can lead to a substantial improvement in operating margins.
I’d hope that Corero will perform in this way, with the possible caveat that sales and marketing expenses could increase sharply, limiting short-term margin gains.
It’s still early days, but I’m certainly encouraged by Corero’s 2021 results. The company seems to be starting to deliver on its potential, in my view.
Focusrite (LON:TUNE)
Share price: 1,129p (+2.7% at 10.00)
Shares in issue: 58.7m
Market cap: £646m
“Performance in the half year was in line with our expectations and remains on track for the full year.”
This musical equipment specialist is on the verge of becoming too large for us here at the SCVR, but it’s been an excellent growth stock since listing in 2014.
Given that Focusrite’s share price has fallen by more than 35% from last year’s peak, I reckon today’s interim results are worth a look. Is this growth story still on track?
Financial highlights: Today’s half-year results cover the six months to 28 February 2022.
- Revenue -2.5% to £92.9m
- Gross margin -1.4% to 36.6%
- Operating profit -33% to £16.3m
- Adjusted earnings -25% to 27.1p per share
- Interim dividend +23% to 1.85p per share
- Net cash -6% to £18m
Trading commentary: CEO Tim Carroll admits that the company is currently dealing with two contradictory sales trends, while also facing supply chain issues.
Demand from home buyers is down from the “unprecedented high levels” seen during lockdown periods.
In contrast, demand from professional buyers for live events is “continuing to grow” with positive signs “towards a full recovery of live events”.
Focusrite’s portfolio includes a broad mix of brands and equipment that target both small-scale creators and live events. What isn’t yet clear is just how this changing mix will affect the group’s margins and sales growth.
Today’s results include a breakdown of the impact on changing market demand on some of Focusrite’s key brands:
- Focusrite revenue down by 11.7% to £65.4m
- ADAM Audio (studio speakers) - revenue down by 33% to £8.4m. Blamed on component shortages.
- Martin Audio (professional speakers for live events) - revenue up by 44% to £12.5m
Focusrite says it’s launched a number of new products during the period and is also starting to rebuild inventories of the popular Scarlett devices.
My view: It looks like this year will be a transitional period for Focusrite. The group is navigating from the distorted demand of lockdown markets back to something like normality, while also dealing with component shortages.
In this context, I think today’s half-year results look pretty solid. Full-year guidance remains unchanged, implying revenue growth of 2.4% and a 15% fall in adjusted earnings.
These forecasts prices Focusrite shares on around 22 times forecast earnings, with a modest yield:
This is obviously not cheap, especially for a business with falling earnings. Although earnings are expected to return to growth in 2022/23, they are expected to remain below last year’s record highs.
My main concern here is that the market may re-rate this stock to a lower multiple, to reflect a more measured view of future growth.
Offsetting this, I remain impressed by the quality and profitability of this business. Focusrite boasts some notable brands and strong management, led by founder and executive chairman Phil Dudderidge.
On balance, my view is that Focusrite is probably reasonably valued at current levels and is likely to deliver further growth over time.
Obviously, there are some uncertainties here. But if I owned the shares, I’d certainly continue holding them after today’s results.
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