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Deleveraged and delivering growth

CentralNic Group 24 November 2022 Update
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CentralNic Group

Deleveraged and delivering growth

Q322 interim results

Software and comp services

24 November 2022

Price

115p

Market cap

£332m

£1.21/US$

Net debt (US$m) at 30 September 2022

63.4

Shares in issue

288.7m

Free float

73%

Code

CNIC

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(10.2)

(0.9)

(18.9)

Rel (local)

(16.8)

(0.7)

(18.1)

52-week high/low

149p

111p

Business description

CentralNic Group provides the essential tools for businesses to go online, operating through two divisions: Online Presence (reseller, corporate, and SME) and Online Marketing. Services include domain name reselling, hosting, website building, security certification and website monetisation.

Next events

FY22 trading update

30 January 2023

Analysts

Max Hayes

+44 (0)20 3077 5700

Katherine Thompson

+44 (0)20 3077 5700

CentralNic Group is a research client of Edison Investment Research Limited

CentralNic (CNIC) delivered high double-digit organic revenue growth in the nine months to 30 September (9M22), supplemented by five acquisitions year to date. Revenues in Online Marketing, now the group’s largest business segment (78% of 9M22 revenues), were up 147% y-o-y, driving overall performance and highlighting sustained market demand for privacy-safe marketing solutions. Adjusted EBITDA as a percentage of net revenue expanded by more than 7pp y-o-y, illustrating stronger operating leverage. Improved profitability, alongside the group’s cash-generative business model, reduced leverage from 2.2x pro forma EBITDA at end FY21 to 1.2x at end Q322. Our headline forecasts are broadly unchanged due to an uncertain trading environment, although we note the potential for upside if CNIC is able to maintain current run rates.

Year end

Revenue
(US$m)

Adjusted
EBITDA* (US$m)

PBT*
(US$m)

Dil. EPS*
(c)

EV/EBITDA
(x)

P/E
(x)

12/20

240.0

29.4

17.6

6.9

15.6

20.0

12/21

410.5

46.3

31.9

10.9

9.9

12.6

12/22e

702.7

81.1

66.5

17.2

5.7

8.0

12/23e

809.8

93.0

78.2

19.0

4.9

7.2

Note: *Excludes impact of share-based payments, foreign exchange charges and non-core operating costs.

Forecasts indicate significant upside potential

In 9M22, revenues were up 88% y-o-y to $526.7m and adjusted EBITDA by 101% y-o-y to $62m. In Q3, revenue and EBITDA were up 8% q-o-q and 16% q-o-q respectively to $192m and $23.4m. Online Marketing was the primary catalyst, with 100% ytd organic growth mainly driven by CNIC’s TONIC media buying platform and overall performance benefiting from the group’s accelerated acquisition strategy. Despite positive market tailwinds, we have left our headline forecasts materially unchanged due to an uncertain macro environment. However, we believe there is significant upside potential given momentum in the group’s performance ytd and its track record of delivering growth in challenging conditions.

Well capitalised to deliver growth

The group’s growing profitability alongside a consistently high operating cash conversion strengthened CNIC’s balance sheet over 2022, with net debt/pro forma EBITDA falling from 2.2x at end FY22 to 1.2x at end Q322. Given the trend in profit growth, we believe CNIC is in a strong position to rapidly reduce the size of its net debt over the coming years and may be able to use its free cash flow for future acquisitions, rather than relying on its revolving credit facility. As highlighted in our previous note, its new debt facilities will see a significant reduction in borrowing costs: our FY23 forecasts indicate an interest coverage ratio of 10.6x.

Valuation: Trading at a discount despite consistency

Relative to its online marketing peers, CNIC has been able to achieve superior revenue and profit growth using lower leverage over FY22. Despite this, the group trades at a 69% discount to peers on FY22 and FY23 EV/EBITDA multiples.

Q322 results review

CNIC reported strong top-line growth in its Q322 results, with revenue up 88% y-o-y in 9M22 to $526.7m and up 80% y-o-y in the quarter to $192.1m. Organic y-o-y growth reached a record 66% in 9M22 and the overall group performance benefited from its accelerated acquisition strategy.

Online Marketing contributed the most to overall group performance, benefiting from sustained market demand for privacy-safe marketing solutions. The company saw not only an 83% y-o-y increase in the number of visitor sessions to 1.8 billion, but also a 60% uplift in revenue per thousand sessions to $104.1, highlighting that the quality of media buying activity has increased over the year.

Online Presence’s performance remained broadly flat, resulting from a mixture of a fall in average revenue per domain, offset by an increase in the number of processed domain registrations.

Exhibit 1: Summary of the Q322 results

US$m

Q322

Q321

y-o-y change

9M22

9M21

y-o-y change

Revenue

192.1

106.8

80%

526.7

280.6

88%

Online Marketing

154.8

70.6

119%

412.6

167.0

147%

Online Presence

37.3

36.2

3%

114.1

113.6

1%

Net revenue (gross profit)

46.2

29.8

55%

128.3

84.1

53%

Adjusted EBITDA

23.4

11.3

107%

62.0

30.9

101%

Net revenue/adjusted EBITDA (%)

50.6

37.9

12.9pp

48.3

36.7

11.6pp

Operating profit

13.4

3.4

294%

35.1

6.5

440%

Adjusted operating cash conversion

N/M

N/M

N/M

105%

118%

N/M

Profit/(loss) after tax

(0.4)

(2.2)

N/M

6.5

(5.3)

N/M

EPS basic (c)

(0.2)

(0.9)

N/M

2.5

(2.3)

N/M

Adjusted EPS (c)

2.8

1.8

58%

11.3

7.1

60%

Net debt

63.4

78.6

(19%)

63.4

78.6

(19%)

Source: CentralNic, Edison Investment Research

Forecasts materially unchanged

We have lowered our FY22 gross margin in line with the growth of the lower-margin Online Marketing business. Our adjusted EBITDA/net revenue estimate has risen by 3.5pp to 48.5% as the group continues to strengthen its operating leverage. This increase is offset by the fall in gross margin, leaving FY22 EBITDA materially unchanged.

Our FY22 PBT and net income forecasts have been affected by a temporary increase in finance costs during 9M22. Most of the finance cost relates to both the early repayment of its previous bond and the weakness of the euro against the dollar in 2022. CNIC’s new financing facility is denominated in dollars so this should not be an ongoing concern. The initial costs of the new facility will be 2.75% above secured overnight financing rate (SOFR) (c 6.5%), significantly below Euribor plus 7% for the previous senior secured bond it replaced, which we have reflected in a 10% increase in our FY23 PBT forecast. Between 9 and 21 November 2022, CNIC entered into interest rate swap transactions to fix the variable interest component on $75m of the new $150m term loan at a blended fixed rate of 3.92%, improving visibility on its future borrowing costs.

Exhibit 2: Summary of our forecast changes

US$000s

FY21

FY22 (old)

FY22 (new)

Change

y-o-y growth

FY23 (old)

FY23 (new)

Change

y-o-y growth

Gross revenue

410,540

701,931

702,681

0%

71%

804,783

809,808

1%

15%

Net revenue

118,499

179,938

167,131

(7)%

41%

199,958

189,831

(5)%

14%

Adjusted EBITDA

46,251

80,972

81,059

0%

75%

92,440

93,017

1%

15%

Profit Before Tax (norm)

31,939

65,006

66,476

2%

108%

77,835

78,182

0%

18%

Profit Before Tax (reported)

1,555

27,933

38,485

38%

2375%

42,405

46,641

10%

21%

Net income (normalised)

25,551

52,005

47,863

(8)%

87%

58,377

56,291

(4)%

18%

Basic av. shares outstanding (m)

227

271

270

(0)%

281

289

EPS - basic normalised (c)

11.24

19.18

17.73

(8)%

58%

20.78

19.50

(6)%

10%

EPS - diluted normalised (c)

10.91

17.87

17.24

(4)%

58%

19.42

18.99

(2)%

10%

Revenue growth (%)

71.0

71.0

71.2

14.7

15.2

Gross Margin (%)

28.9

25.6

23.8

24.8

23.4

Adj. EBITDA margin (%)

11.3

11.5

11.5

11.3

11.5

Adj. EBITDA/net revenue (%)

39.0

45.0

48.5

46.0

49.0

Capex

(3,555)

(7,929)

(4,238)

(47)%

19%

(9,091)

(4,453)

(51)%

5%

Closing net debt/(cash)

81,394

61,373

37,584

(39)%

(54)%

17,212

(22,109)

(228)%

(159)%

Source: CentralNic, Edison Investment Research

Valuation: Discount to peers despite superior growth

CNIC has quickly established itself as one of the leading online marketing players since it entered the fray in FY19, using an accelerated acquisition programme coupled with its internal expertise. Online Marketing continues to deliver strong growth and supported CNIC’s recognition in the Financial Times’ top 250 fastest growing companies list. This makes for a compelling investment case when put alongside the company’s low customer churn, high recurring revenues, expanding margins and strengthened balance sheet. We believe there is still significant scope for growth, highlighted by the fact that our FY22 revenue forecast only makes up 11bp of the total global online marketing spend of $616bn (CNIC presentation).

Despite this, the group trades at a discount to both its online marketing and online presence peers across EV/Sales, EV/EBITDA and P/E. CNIC is trading on an EV/EBITDA of 5.7x in FY22e and 4.9x in FY23e, which is a discount of 69% compared to its online marketing peers in both FY22 and FY23. The discount closes to 60% and 61% respectively when looking at the wider peer group, which includes online marketing and online presence peers. We believe that continued organic growth and margin expansion should support a reduction in the discount to peers and a move towards the online marketing peer group valuation.

Exhibit 3: Peer group table

Year end

Share price

Quoted Ccy

EV (US$m)

Sales Growth FY1 (%)

EBITDA margin FY1 (%)

EV/ sales FY1(x)

EV/ sales FY2 (x)

EV/ EBITDA FY1 (x)

EV/ EBITDA FY2 (x)

P/E 1FY (x)

P/E 2FY (x)

CentralNic Group

Dec-22

115.0

GBp

460

71.2

11.5

0.7

0.6

5.7

4.9

8.0

7.2

Online marketing peers

Trade Desk

Dec-22

49.5

USD

23,292

32.0

41.2

14.7

12.2

35.8

33.0

48.4

45.1

Applovin

Dec-22

14.1

USD

7,019

0.8

37.6

2.5

2.5

6.6

6.3

NM

39.4

Stroeer SE & Co

Dec-22

44.3

EUR

4,020

1.6

30.5

2.2

2.1

7.2

7.1

14.9

15.1

DoubleVerify Holdings

Dec-22

25.9

USD

4,048

35.8

30.7

9.0

7.2

29.2

23.2

95.4

67.6

Integral Ad Science

Dec-22

9.9

USD

1,693

24.2

30.5

4.2

3.6

13.8

11.7

216.4

68.2

Mean

18.9

34.1

6.5

5.5

18.5

16.3

93.8

47.1

Median

24.2

30.7

4.2

3.6

13.8

11.7

71.9

45.1

Online presence (web services) peers

Verisign

Dec-22

199.3

USD

21,710

7.2

68.9

15.3

14.0

22.1

19.4

32.4

27.8

GoDaddy

Dec-22

75.4

USD

14,334

7.2

24.8

3.5

3.3

14.1

13.3

34.0

27.7

Criteo

Dec-22

26.4

USD

1,026

0.1

27.3

1.1

1.0

4.1

3.7

10.3

10.3

Catena Media

Dec-22

24.3

SEK

243

(7.4)

42.8

1.7

1.9

4.0

4.8

6.4

8.6

iomart group

Mar-23

119.0

GBp

210

(12.9)

36.8

1.5

1.7

4.1

4.8

8.8

10.6

Mean

(1.2)

40.1

4.6

4.4

9.7

9.2

18.4

17.0

Mean (ex-Verisign)

(3.2)

32.9

2.0

2.0

6.6

6.6

14.9

14.3

Median

0.1

36.8

1.7

1.9

4.1

4.8

10.3

10.6

Total mean

8.9

37.1

5.6

5.0

14.1

12.7

51.9

32.0

Total median

4.4

33.8

3.0

2.9

10.5

9.4

32.4

27.8

Source: Refinitiv data as at 24 November 2022; CentralNic estimates are from Edison Investment Research


Exhibit 4: Financial summary

$'000s

2019

2020

2021

2022e

2023e

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

109,194

240,012

410,540

702,681

809,808

Cost of Sales

(66,419)

(164,894)

(292,041)

(535,550)

(619,977)

Gross Profit

42,775

75,118

118,499

167,131

189,831

EBITDA

 

 

17,921

29,394

46,251

81,059

93,017

Normalised operating profit

 

 

16,615

27,310

42,737

77,128

88,488

Amortisation of acquired intangibles

(8,299)

(13,747)

(18,291)

(21,035)

(21,035)

Exceptionals

(8,259)

(10,529)

(7,087)

1,000

0

Share-based payments

(2,878)

(5,113)

(5,006)

(5,006)

(5,006)

Reported operating profit

(2,821)

(2,079)

12,353

52,088

62,447

Net Interest

(3,869)

(9,834)

(10,798)

(10,652)

(10,305)

Joint ventures & associates (post tax)

74

79

0

0

0

Exceptionals

0

0

0

(2,950)

(5,500)

Profit Before Tax (norm)

 

 

12,820

17,555

31,939

66,476

78,182

Profit Before Tax (reported)

 

 

(6,616)

(11,834)

1,555

38,485

46,641

Reported tax

39

975

(5,097)

(20,608)

(24,236)

Profit After Tax (norm)

10,256

14,044

25,551

47,863

56,291

Profit After Tax (reported)

(6,577)

(10,859)

(3,542)

17,878

22,405

Minority interests

64

0

0

0

0

Net income (normalised)

10,320

14,044

25,551

47,863

56,291

Net income (reported)

(6,513)

(10,859)

(3,542)

17,878

22,405

Basic average number of shares outstanding (m)

175

197

227

270

289

EPS - basic normalised (c)

 

 

5.89

7.14

11.24

17.73

19.50

EPS - diluted normalised (c)

 

 

5.72

6.86

10.91

17.24

18.99

EPS - basic reported (c)

 

 

(3.72)

(5.52)

(1.56)

6.62

7.76

Dividend (c)

0.00

0.00

0.00

0.00

0.00

Revenue growth (%)

95.0

119.8

71.0

71.2

15.2

Gross Margin (%)

39.2

31.3

28.9

23.8

23.4

EBITDA Margin (%)

16.4

12.2

11.3

11.5

11.5

EBITDA/Net Revenue (%)

41.9

39.1

39.0

48.5

49.0

Normalised Operating Margin

15.2

11.4

10.4

11.0

10.9

BALANCE SHEET

Fixed Assets

 

 

217,544

270,578

271,830

337,745

322,211

Intangible Assets

206,055

255,716

254,169

320,084

304,550

Tangible Assets

6,427

8,677

8,601

8,601

8,601

Investments & other

5,062

6,185

9,060

9,060

9,060

Current Assets

 

 

67,433

77,606

128,391

208,495

277,152

Stocks

491

1,011

895

1,570

1,798

Debtors

40,760

47,941

71,363

115,509

124,245

Cash & cash equivalents

26,182

28,654

56,133

91,416

151,109

Other

0

0

0

0

0

Current Liabilities

 

 

78,767

96,421

137,129

173,372

199,083

Creditors

75,683

89,256

117,016

171,535

197,246

Tax and social security

0

0

0

0

0

Short term borrowings

2,213

5,819

18,276

0

0

Lease liabilities

871

1,346

1,837

1,837

1,837

Long Term Liabilities

 

 

129,206

137,867

149,110

171,084

171,084

Long term borrowings

98,967

107,820

119,251

129,000

129,000

Other long term liabilities

30,239

30,047

29,859

42,084

42,084

Net Assets

 

 

77,004

113,896

113,982

201,785

229,196

Minority interests

(69)

0

0

0

0

Shareholders' equity

 

 

76,935

113,896

113,982

201,784

229,195

CASH FLOW

Op Cash Flow before WC and tax

2,989

3,997

23,360

63,450

72,206

Working capital

8,963

4,129

1,503

9,697

16,748

Exceptional & other

6,673

14,526

15,804

15,966

15,234

Tax

(2,309)

(1,957)

(2,230)

(6,182)

(24,236)

Net operating cash flow

 

 

16,316

20,695

38,437

82,932

79,951

Capex

(15,497)

(4,259)

(3,555)

(4,238)

(4,453)

Acquisitions/disposals

(60,900)

(37,065)

(18,344)

(86,950)

(5,500)

Interest paid

(1,970)

(9,512)

(8,647)

(10,652)

(10,305)

Equity financing

2,133

34,667

0

58,500

0

Change in borrowing

101,047

1,563

26,006

18,892

0

Other

(31,307)

(4,734)

(3,700)

(23,200)

0

Net Cash Flow

9,822

1,355

30,197

35,283

59,693

Opening net debt/(cash)

 

 

2,115

74,998

84,985

81,394

37,584

FX

(6,730)

1,117

(2,718)

0

0

Other non-cash movements

(75,975)

(12,459)

(23,888)

8,527

0

Closing net debt/(cash)

 

 

74,998

84,985

81,394

37,584

(22,109)

Source: Company accounts, Edison Investment Research

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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

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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Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

Australia

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.

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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.

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

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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