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Acquisition of Codewise and £30m placing

CentralNic Group 14 September 2020 Update
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CentralNic Group

Acquisition of Codewise and £30m placing

M&A & placing

Software & comp services

14 September 2020

Price

85.25p

Market cap

£198m

£1.28/US$

Net debt (US$m) at 30 June 2020

76.4

Shares in issue (post-placing)

232.1m

Free float

55.4%

Code

CNIC

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

2.1

(0.9)

70.5

Rel (local)

4.2

(0.9)

104.3

52-week high/low

95.0p

40.0p

Business description

CentralNic Group is a leading global domain name services provider, operating through three divisions: Reseller (number two globally); Corporate; and SME. Services include domain name reselling, hosting, website building, security certification and website monetisation (added at the end of 2019).

Next events

Q3 trading update

December 2020

FY trading update

February 2021

FY20 results

April 2021

Analysts

Russell Pointon

+44 (0)20 3077 5757

Richard Williamson

+44 (0)20 3077 5700

CentralNic Group is a research client of Edison Investment Research Limited

CentralNic has announced the conditional US$36m asset-based acquisition (payable in cash on completion) of one of Team Internet’s closest competitors, Codewise, a domain monetisation business based in Poland. Based on the year to 30 June 2020, the deal values Codewise at 0.60x historical sales (US$60.3m) and 4.9x adjusted EBITDA (US$7.4m). The deal is being funded by way of a share placing, with CentralNic having placed 40m shares (21% of the equity) at 75p per share (a 6% discount to the 10 September closing price), raising gross proceeds of £30m. Assuming a year end completion date, we estimate that the deal will be materially (c 18%) EPS enhancing in FY21. The acquisition is highly complementary to the successful Team Internet acquisition, completed in December 2019, building CentralNic’s technology base and market share in domain monetisation, diversifying its client base and strengthening the group’s development capability and senior management team.

Year end

Revenue (US$m)

PBT*
(US$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/18

56.0

7.4

5.83

0.0

18.7

N/A

12/19

109.2

12.8

8.16

0.0

13.4

N/A

12/20e

217.8

17.4

5.60

0.0

19.5

N/A

12/21e

295.3

27.7

8.74

0.0

12.5

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

US$36m acquisition of Codewise

Codewise is a monetisation and digital marketing group, with two principal businesses: Zeropark (an online ad-exchange connecting advertisers with domain investors/publishers) and Voluum (SaaS analytics, measurement, optimisation and media buying). CentralNic is also taking on all of Codewise’s employees (140 staff, based in Krakow, Poland), including its development team to deepen CentralNic’s talent pool. Codewise has similar characteristics to CentralNic, including operating a subscription model, high recurring revenues and near 100% cash conversion. The deal is conditional on completion of a business restructuring (among other conditions) and is not expected to complete until around 31 October 2020.

40m shares placed at 75p per share, raising £30m

The total consideration for the acquisition is US$36m (subject to working capital adjustments) on a cash-free, debt-free basis, payable in cash on completion. This represents 4.9x adjusted EBITDA of US$7.4m for the 12 months to 30 June 2020. In parallel with the acquisition, CentralNic has completed a placing of 40m shares (20.8% of existing share capital) at 75p per share (a 6% discount to the prior closing price of 79.75p) to existing and new institutional investors, raising gross proceeds of £30m (c US$39m) to fund the acquisition and associated costs.

Valuation: 18% EPS enhancement in FY21

We estimate the deal to be materially (18%) EPS enhancing in FY21. Even before the acquisition, CentralNic was trading at a substantial discount to its peers. This transaction further deepens the discount, with an FY21 P/E of 12.5x.

Acquisition and placing

Codewise: A leading monetisation platform

Codewise is a very complementary transaction to the successful Team Internet acquisition, completed in December 2019, further building CentralNic’s technology base and market share in domain monetisation, while diversifying the segment’s client base. The deal offers cross-selling opportunities with the broader group and, with CentralNic taking on all of Codewise’s 140 staff, the acquisition also strengthens the group’s development capability and senior management team.

Codewise is a leading competitor to CentralNic’s Team Internet, based in Krakow, Poland. It has two principal businesses, Zeropark and Voluum:

Zeropark is a real-time-bidding ad-exchange platform, connecting advertisers and domain investors and publishers via its marketplace. It operates on a commission basis, taking a commission-based fee from advertiser payments.

Zeropark is highly complementary to Team Internet, significantly increasing CentralNic’s market share in domain monetisation.

Team Internet is highly reliant on a single key customer for c 90% of its revenues. Through its ad-exchange, Zeropark works directly with thousands of publishers and advertisers and therefore substantially reduces the segment’s reliance on a single key client.

Zeropark brings CentralNic new subscription revenue and recurring contract revenue, as well as introducing a suite of new products and technologies that can be applied across the group.

Zeropark will also be able to offer marketing solutions to CentralNic’s Direct client base.

Voluum is a SaaS marketing management suite for SMEs and brands, operating a monthly subscription model that enables online ad analytics, tracking, media buying and AI-powered optimisation. Its software allows companies to establish and manage broad-based advertising campaigns, managing traffic from multiple sources, analysing campaign performance and providing automated optimisation of campaigns through the use of machine learning and AI (A/B testing, traffic redirection and filtering).

In particular, Voluum’s anti-fraud solutions will be attractive to CentralNic’s existing client base, allowing early identification and removal of unwanted advertisements appearing on corporate websites.

Exhibit 1: Pro-rata revenue contribution for 12 months to 30 June 2020

Exhibit 2: Pro-rata adjusted EBITDA contribution for 12 months to 30 June 2020

Source: CentralNic

Source: CentralNic

Exhibit 1: Pro-rata revenue contribution for 12 months to 30 June 2020

Source: CentralNic

Exhibit 2: Pro-rata adjusted EBITDA contribution for 12 months to 30 June 2020

Source: CentralNic

Benefits of the deal: Technology and expertise

The combination of Team Internet and Codewise should be highly complementary, with Team Internet’s business reliant on a single client for c 90% of its internet traffic and monetisation, whereas Zeropark operates an ad-exchange platform, directly connecting a diversified pool of advertisers with the websites of investors.

Codewise’s technology stack is state-of-the-art (eg programmatic SMS), with the platform supported by a dedicated development team. CentralNic will be taking on all of Codewise’s 140 staff, based in Krakow in Poland. CentralNic’s management team has also emphasised the strength of Codewise’s management, who will be joining CentralNic’s senior team.

Management believes that the combination of Codewise (6,000+ paying clients across 190 countries) with Team Internet brings together two leading monetisation platforms. As such, management expects the acquisition to deliver both revenue synergies through cross-selling (applying Codewise’s technology to Team Internet’s clients (and vice versa)) as well as cost synergies, by combining the two technology suites, leveraging bulk discounts and marketing efficiencies. Management also sees the potential for cross-selling additional advertising solutions to the SME and Corporate client base within the Direct segment.

Management has identified approximately US$1m of synergies to date.

Timing of completion

With the placing successfully completed, during the period between announcement and completion of the acquisition, the sellers will continue to operate and manage the Zeropark and Voluum businesses. This will include a pre-completion restructuring of the businesses, with CentralNic’s prior consent required for any material decisions. We understand from management that they expect the acquisition to complete around 31 October 2020.

Revised estimates based on the acquisition and placing

We have revised our estimates based on the following assumptions:

The Codewise deal completes in FY20, with all costs borne in FY20 and assuming a full year of impact from the acquisition in FY21.

We have added Codewise’s adjusted EBITDA of US$7.4m to CentralNic’s FY21 EBITDA estimate, but otherwise, on a conservative basis, we have not included any synergies (US$1m indicated in the announcement). This implies a slight dilution to the FY21 adjusted EBITDA margins (from 14.3% to 13.7%), recognising a level of dilution to group margins from the slightly lower margins at Codewise. We have then assumed FY22 EBITDA margins start to pick up to 14.0%.

We calculate that the Codewise acquisition will be 18% EPS enhancing in FY21 and 15% in FY22. Our old and new estimates are summarised in Exhibit 3 below.

Exhibit 3: Revised estimates

Year end 31 -December

US$000s, IFRS

Old

2020e

New

2020e

Change

Old

2021e

New

2021e

Change

Old

2022e

New

2022e

Change

Revenue

217,823

217,823

-

230,824

295,345

28%

244,709

313,424

28%

Gross profit

70,792

70,792

-

76,172

98,645

30%

80,754

104,684

30%

Adjusted EBITDA

30,670

30,670

-

32,944

40,321

22%

35,832

43,774

22%

Normalised operating profit

30,402

30,402

0%

27,908

36,027

29%

29,204

37,534

29%

Profit before tax (norm)

17,423

17,423

0%

19,628

27,747

41%

21,326

29,658

39%

Profit before tax (reported)

2,469

(531)

10,021

10,865

8%

11,523

12,440

8%

Reported tax

(2,729)

(1,739)

(3,857)

(4,153)

(4,278)

(4,599)

Net income (normalised)

11,617

11,617

0%

14,265

20,273

42%

15,379

21,461

40%

Basic av. shares outstanding (m)

187,269

207,269

11%

192,052

232,052

21%

192,052

232,052

21%

EPS - basic normalised (c)

6.20

5.60

(10)%

7.43

8.74

18%

8.01

9.25

15%

Revenue growth (%)

99.5

99.5

6.0

35.6

6.0

6.1

Gross margin (%)

32.5

32.5

33.0

33.4

33.0

33.4

EBITDA margin (%)

14.1

14.1

14.3

13.7

14.6

14.0

Normalised operating margin (%)

14.0

14.0

12.1

12.2

11.9

12.0

Capex

(2,287)

(2,287)

-

(3,001)

(3,839)

28%

(3,181)

(4,075)

28%

Closing net debt

75,991

79,039

4%

69,925

61,663

(12)%

62,640

41,061

(34)%

Source: Edison Investment Research

Exhibit 4: Financial summary

$'000

2018

2019

2020e

2021e

2022e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

US$'000

US$'000

US$'000

US$'000

US$'000

Revenue

 

 

55,991

109,194

217,823

295,345

313,424

Cost of Sales

(30,080)

(66,419)

(147,031)

(196,700)

(208,740)

Gross Profit

25,911

42,775

70,792

98,645

104,684

Adj. EBITDA

 

 

9,146

17,920

30,670

40,321

43,774

Normalised operating profit

 

 

8,820

16,614

30,402

36,027

37,534

Amortisation of acquired intangibles

(5,600)

(8,299)

(9,423)

(16,882)

(17,217)

Exceptionals

(6,362)

(7,431)

(5,797)

-

-

Share-based payments

(469)

(2,878)

(2,734)

-

-

Reported operating profit

(3,611)

(1,994)

12,448

19,145

20,317

Net Interest

(1,430)

(3,869)

(7,179)

(7,280)

(7,177)

Joint ventures & associates (post tax)

45

74

-

-

-

Exceptionals

-

-

(5,800)

(1,000)

(700)

Profit Before Tax (norm)

 

 

7,435

12,819

17,423

27,747

29,658

Profit Before Tax (reported)

 

 

(4,996)

(5,789)

(531)

10,865

12,440

Reported tax

(1,428)

39

(1,739)

(4,153)

(4,599)

Profit After Tax (norm)

7,435

14,227

11,617

20,273

21,461

Profit After Tax (reported)

(6,424)

(5,750)

(2,270)

6,712

7,841

Minority interests

5

64

-

-

-

Discontinued operations

-

-

-

-

-

Net income (normalised)

7,440

14,291

11,617

20,273

21,461

Net income (reported)

(6,419)

(5,686)

(2,270)

6,712

7,841

Basic average number of shares outstanding (m)

127,515

127,515

175,084

207,269

232,052

EPS - basic normalised (c)

 

 

5.83

8.16

5.60

8.74

9.25

EPS - diluted normalised (c)

 

 

5.56

7.92

5.46

8.54

9.04

EPS - basic reported (c)

 

 

(5.03)

(3.25)

(1.10)

2.89

3.38

Dividend (c)

0.00

0.00

0.00

0.00

0.00

Revenue growth (%)

75.3

155.9

99.5

35.6

6.1

Gross Margin (%)

46.3

39.2

32.5

33.4

33.4

EBITDA Margin (%)

16.3

16.4

14.1

13.7

14.0

Normalised Operating Margin

15.8

15.2

14.0

12.2

12.0

BALANCE SHEET

Fixed Assets

 

 

132,321

217,544

285,735

271,160

256,390

Intangible Assets

127,267

206,055

271,298

257,369

243,286

Tangible and Right-of-use Assets

931

6,427

10,014

9,367

8,681

Investments & other

4,123

5,062

4,423

4,423

4,423

Current Assets

 

 

51,378

67,433

63,248

95,706

122,548

Stocks

3,906

491

545

738

940

Debtors

24,382

40,760

37,683

52,571

58,610

Cash & cash equivalents

23,090

26,182

25,020

42,396

62,998

Other

-

-

-

-

-

Current Liabilities

 

 

(62,443)

(78,767)

(74,984)

(87,482)

(92,490)

Creditors

(59,719)

(75,683)

(68,394)

(80,564)

(85,496)

Tax and social security

(452)

-

-

-

-

Short term borrowings

(2,272)

(3,084)

(6,590)

(6,918)

(6,994)

Other

-

-

-

-

-

Long Term Liabilities

 

 

(43,188)

(129,206)

(128,384)

(137,207)

(139,265)

Long term borrowings

(22,933)

(102,799)

(101,616)

(102,764)

(103,032)

Other long term liabilities

(20,255)

(26,407)

(26,768)

(34,443)

(36,233)

Net Assets

 

 

78,068

77,004

145,615

142,177

147,184

Minority interests

(5)

69

-

-

-

Shareholders' equity

 

 

78,063

77,073

145,615

142,177

147,184

CASH FLOW

PBT

(4,996)

(5,789)

(531)

10,865

12,440

Depreciation and amortisation

5,926

9,605

10,553

18,415

18,844

Share-based payments

469

2,878

-

-

-

Working capital

7,783

8,136

(4,266)

(2,911)

(1,309)

Exceptional & other

2,650

3,795

7,179

7,280

7,177

Tax

(3,015)

(2,309)

(1,739)

(4,153)

(4,599)

Net operating cash flow

 

 

8,817

16,316

11,197

29,496

32,553

Capex

(4,920)

(15,497)

(2,287)

(3,839)

(4,075)

Acquisitions/disposals

(27,568)

(63,840)

(42,838)

(1,000)

(700)

Net interest

(682)

(1,970)

(7,179)

(7,280)

(7,177)

Equity financing

30,869

2,133

39,004

-

-

Dividends

-

-

-

-

-

Other

-

-

(3,000)

-

-

Net Cash Flow

6,516

(62,858)

(5,104)

17,376

20,601

Opening net debt/(cash)

 

 

8,667

2,115

74,998

79,039

61,663

FX

(1,374)

(10,974)

1,063

-

-

Other non-cash movements

1,410

949

-

-

-

Closing net debt/(cash)

 

 

2,115

74,998

79,039

61,663

41,061

Source: Company accounts, Edison Investment Research. Note: *FY19 figures have been restated to reclassify FX on borrowings and administrative expenses to finance costs and other income respectively.

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This report has been commissioned by CentralNic Group and prepared and issued by Edison, in consideration of a fee payable by CentralNic Group. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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This report has been commissioned by CentralNic Group and prepared and issued by Edison, in consideration of a fee payable by CentralNic Group. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for ‘wholesale clients’ within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are ‘wholesale clients’ for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a ‘personalised service’ and, to the extent that it contains any financial advice, is intended only as a ‘class service’ provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the ‘FPO’) (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the ‘publishers' exclusion’ from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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