Small Caps | Aug 25 2021
While short-term supply chain risks weigh, Audinate Group is seen as both a structural beneficiary of covid-19 and a re-opening story.
-Audinate Group delivered 23% FY21 revenue growth
-A return to historical growth rates is anticipated
-The company has 7% of a 1bn total addressable market
-Dante is seen as the de-facto standard in networked audio
-Supply chain risks to persist into the first half of FY22
By Mark Woodruff
In the wake of pre-released FY21 results for Audinate Group ((AD8),) brokers continue to ratchet-up 12-month target prices and expressed confidence in the company’s future.
The group develops and sells digital audio visual (AV) networking solutions and can be viewed as both a re-opening story and a structural beneficiary of covid-19. In addition, it’s thought the company’s video software product could further accelerate adoption.
Network effects are becoming more relevant as the structural shift to networked AV unfolds and it becomes harder for original equipment manufacturers (OEMs) and users to adopt alternatives. OEMs including Bose, Yamaha, Shure and Sony sell Pro-AV products (speakers, amplifiers and mixers) to system integrators.
End users include universities, corporates, convention centres, theatres, stadiums, theme parks and recording studios.
Audinate is in a dominant position as the de-facto standard in audio networking with 19 times the market adoption of its closest competitor. The company has a broad and expanding customer base and gross margins are greater than 75%.
Some features of the FY21 result included 23% total revenue growth and 68% year-on-year growth in software revenue. Another 66 OEMs were added and a there was a 16% rise in Dante-enabled products to 3,255.
Dante comprises hardware and software that resides inside the audio and video products of Audinate’s OEM customers. Hardware, also referred to as chips, card and modules (CCM), comprised 72% of sales in FY21, with software making up the balance.
Guidance is for a return to historical US dollar revenue growth rates of 26%-31%, even with some likely headwinds from supply chain disruptions and covid.
Valuation
The company is expecting to materially step up investment in FY22, which is likely to include strategic M&A. Also, overall industry growth will be aided by the structural shift to networked AV.
When this is coupled to the return of live sound and the initial revenue contribution from Dante AV, Canaccord Genuity forecasts above-trend 30% compound annual growth rate (CAGR) for revenue over the medium term.
By stark contrast, the current share price implies just a 17.5% six-year revenue CAGR at around 50% earnings margins. This assumes a 9% market adoption across key markets by 2027.
The broker, not one of the seven stockbrokers monitored daily on the FNArena database, maintains its Buy rating and lifts its price target to $11.20 from $10.50.
UBS incorporates $1.69 into its share price valuation to reflect a 10% share of the potential digital video networking opportunity. The broker raises its target price to $11.75 from $11.30 and retains its Buy rating.
The outlook
A record second half result points to strong momentum coming into FY22. Management indicated the sales order backlog is at record levels and industry sentiment was at all-time highs in July.
Credit Suisse’s forecast remains at the high end of the revenue guidance range for FY22, while FY23 revenue forecasts are broadly unchanged as the analyst sees only transitory near-term supply chain disruptions. After earnings upgrades, the broker lifts its target price to $11.40 from $9.70 and leaves its Outperform rating unchanged.
Morgan Stanley highlights the approach of cashflow breakeven and $65m in cash and on term deposit. Taking into account strong July sales, a record order backlog and a new product pipeline, the broker retains its Overweight rating and increases its target price to $12.00 from $10.00.
Software
Software revenue grew 62% and accounted for 27% of total revenue, up from 21% in FY20. This software revenue growth was well ahead of ahead of CCM which rose 13%.
Sales were slightly weaker in the second half due to the shifting of upfront licence fees to annual subscription though this improves the resilience and predictability of revenues, notes Canaccord.
Morgan Stanley believes the video software product could further accelerate adoption in FY22, as it has recently been prioritised due to video OEM feedback.
The Opportunity
There is a greater than $1bn total addressable market, which Shaw and Partners believes Audinate should own in time, due to its holistic offering of audio, software and video. The company’s current market share is around 7%.
After the 2020 mid-year capital raise, the analyst likes the company’s well capitalised position and the healthy gross margins, which are likely to rise further with a ramp-up in software.
The broker, also not one of the seven stockbrokers monitored daily on the FNArena database, retains its Buy rating and $12.00 target price.
Morgan Stanley notes the company has all the key products and it is now a case of driving increased adoption.
Dante has already secured its position as de-facto standard in networked audio, suggests Credit Suisse. As sales continue to grow sequentially it increases scope for reinvestment which can grow the total addressable market and market share. This is evidenced by the recent release of Dante video products, which creates an additional opportunity in software services.
The company is seen as a covid structural beneficiary story as both the corporate and education sectors are expected to invest in the new normal.
Risks
Supply chain and manufacturing risks are still present, and Canaccord expects chip and component shortages to persist into the first half of FY22.
There’s also expected to be temporary closures of the company’s Malaysia manufacturing facility due to local covid cases though it should be noted this facility was originally set up to diversify supply chain risk.
Potential delays from the diversion of R&D away from new products by OEM’s are possible. OEM customers are looking at product redesign where either chips or component shortages are in evidence. This could potentially defer the launch of new Dante products as well as potentially impacting new design wins, notes Canaccord.
However, in the near-term management does not expect these factors to immediately impact revenue growth, given the strength of the demand backdrop and the record backlog of orders.
In closing, there is one word which augers well for Audinate, Lollapalooza. It’s a music festival which recently had one of the largest public gatherings since the start of the pandemic, with over 100,000 attendees in Chicago, US.
While concerts have been in hiatus since the middle of March 2020, a number of major tours and festivals are now being locked in for the end of this year and 2022.
FNArena’s database has three broker ratings with three Buy ratings and a consensus target price of $11.72, which suggests 14.9% upside to the last share price.
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