Small Caps | Apr 09 2020
Audinate is expected to withstand the current downturn, given its market share, but revenue could be challenged in the short term.
-Current backlog of committed orders higher than average
-There may not be an immediate impact from the downturn
-Dominant market share should enable Audinate to ride the cycle
By Eva Brocklehurst
As many enterprises and venues that are likely to use the audio services of Audinate ((AD8)) close, amid measures to prevent the spread of the coronavirus, the company has had to withdraw guidance.
Guidance had signalled second half growth would be greater than the first. Nevertheless, third quarter revenues, which are usually seasonally weaker, were strong, up 13%.
Shaw and Partners considers this an excellent outcome, noting the contribution from gross margins, software momentum and new Dante products. Canaccord Genuity also suspects the move in the share price following the announcement was a sign investors were expecting something worse.
The business has a strong balance sheet with no debt and 60% of orders are pre-paid with low default and cancellation rates, Shaw points out. Even if sales were to fall by more than -40% or operations were shut down for three months there is still positive monthly cash flow.
Moreover, there are multiple new revenue streams coming on line in the next few months. The stock remains one of the broker's key small cap picks, with a Buy rating and $8.50 target.
Canaccord Genuity believes the broader economic downturn may not have an immediate effect on the revenue profile and expects a more pronounced impact in FY21. Credit Suisse agrees the impact of the crisis may lag, and could be large, noting sales are particularly at risk because of the exposure to large gatherings and with customers able to defer expenditure.
The broker also looks to the GFC for some indication as to how the macro environment affected audio sales. Yamaha, a large customer and shareholder of Audinate, experienced a decline in sales of around -25% over two years.
Of interest, the 12 months to March 2010 witnessed a larger decline than the 12 months to March 2009, which signals there was some lag between the initial shock and stock market decline and the impact on that company.
Interestingly, the current backlog of Audinate's committed but unfulfilled sales orders is higher than the average monthly backlog for the previous eight months of FY20. Meanwhile, manufacturing in China is now back to full operations, mitigating the shutdown in Malaysia.
While there are discrete revenues on a transaction basis the earnings profile is perceived as recurring, as unit sales from OEM (original equipment manufacturer) partners are relatively stable. Canaccord Genuity estimates 85% of revenue is indirectly sourced from AV system integrators that purchase an array of OEM network products.
Shaw also suspects there is unlikely to be an immediate reduction in product releases, as any reduction in R&D expenditure will have a lagged effect.
Shaw and Partners, not one of the seven stockbrokers monitored daily on the FNArena database, cuts FY20 and FY21 sales forecast by -5% and -17% respectively and does not subscribe to the view that sales are likely to fall away dramatically. One of the main attractions the broker notes is that various costs can be flexed.
Yet Credit Suisse points out the company's update appears to show the bulk of the cost base remains in place. The broker finds the business attractive for its structural shift and market share opportunity, which should lead to robust margins. Still, revenue is expected to be challenged in the short term and managing cash will be the main focus.
Canaccord Genuity assesses Audinate is one stock that can be genuinely considered as an option through the cycle, given its dominant market share. While cautious regarding the near term, the broker, also not one of the seven, has a Buy rating and $5.50 target.
Credit Suisse is more circumspect and would become more confident once the shape of the cycle is better understood and the need for any equity raising diminishes. FNArena's database has two Buy ratings and one Hold (Credit Suisse). The consensus target is $7.47, signalling 43.3% upside to the last share price.
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