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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.
CentralNic Group |
Acquisition of Codewise and £30m placing |
M&A & placing |
Software & comp services |
14 September 2020 |
Share price performance
Business description
Next events
Analysts
CentralNic Group is a research client of Edison Investment Research Limited |
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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* |
EPS* |
DPS |
P/E |
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.
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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 |
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Source: CentralNic |
Source: CentralNic |
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Exhibit 1: Pro-rata revenue contribution for 12 months to 30 June 2020 |
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Source: CentralNic |
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Exhibit 2: Pro-rata adjusted EBITDA contribution for 12 months to 30 June 2020 |
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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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