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Research: TMT
CentralNic’s Q320 results highlighted that the group is on course to meet management’s FY20 financial expectations, supported by organic growth and underpinned by a successful M&A strategy. Ytd revenue increased by 118% to US$168.5m, driven by contributions from the transformational acquisitions made in H219. Adjusted EBITDA increased by 68% to US$22.1m. On a pro forma basis, the group recorded organic revenue growth of 17% y-o-y, 10% growth in gross profits and 4% growth in adjusted EBITDA. Adjusted net debt stood at US$80.9m (adjusted for the US$36m cash payment for Codewise made in October). The company trades on an FY21 P/E multiple of 13.1x, which appears highly conservative for a group that has delivered a 69% revenue CAGR FY14–19 as it consolidates a globally fragmented market. We maintain our estimates.
CentralNic Group |
Delivering on its growth model |
Q320 results update |
Software & comp services |
2 December 2020 |
Share price performance
Business description
Next events
Analyst
CentralNic Group is a research client of Edison Investment Research Limited |
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CentralNic’s Q320 results highlighted that the group is on course to meet management’s FY20 financial expectations, supported by organic growth and underpinned by a successful M&A strategy. Ytd revenue increased by 118% to US$168.5m, driven by contributions from the transformational acquisitions made in H219. Adjusted EBITDA increased by 68% to US$22.1m. On a pro forma basis, the group recorded organic revenue growth of 17% y-o-y, 10% growth in gross profits and 4% growth in adjusted EBITDA. Adjusted net debt stood at US$80.9m (adjusted for the US$36m cash payment for Codewise made in October). The company trades on an FY21 P/E multiple of 13.1x, which appears highly conservative for a group that has delivered a 69% revenue CAGR FY14–19 as it consolidates a globally fragmented market. We maintain our estimates.
Year end |
Revenue (US$m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/18 |
56.0 |
7.4 |
5.83 |
0.0 |
19.5 |
N/A |
12/19 |
109.2 |
12.8 |
8.16 |
0.0 |
14.0 |
N/A |
12/20e |
217.8 |
17.4 |
5.58 |
0.0 |
20.4 |
N/A |
12/21e |
295.3 |
27.7 |
8.67 |
0.0 |
13.1 |
N/A |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Q320 results: Strong top-line growth
9M20 revenue increased by 118% to US$168.5m (Q1–Q319: US$77.1m), driven by contributions from the four acquisitions made in H219, Team Internet (Monetisation), Ideegeo (Direct), Hexonet and TPP Wholesale (Indirect), with gross profit increasing by 74% to US$53.3m (Q1–Q319: US$30.6m). Gross margins reduced from 40% to 32%, reflecting the change in business mix, as margins were maintained for each individual segment. Net debt stood at US$44.9m before a US$36m cash payment for the acquisition of Codewise, completed in October.
Outlook: Organic growth and M&A underpin FY20
Despite the COVID-19 pandemic, the group has continued to perform strongly ytd, with organic revenue growth of 17% supplemented by selective acquisitions in line with the group’s consolidation strategy. On the basis of the group’s performance ytd, management remains confident in the outlook for FY20, given the group’s high recurring revenues, strong cash conversion, continuing organic growth and a full pipeline of potential future deals in what is a large, globally fragmented and growing market. Having previously raised our estimates in September after the announcement of the acquisition of Codewise, we maintain our estimates.
Valuation: 13.1x FY21e P/E, 8.5x EV/adj EBITDA
As CentralNic consolidates a globally fragmented market of sub-scale, cash-generative businesses, we would expect earnings accretive M&A to bring multiples down further. Despite a historic FY14–19 revenue CAGR of 69% and a forecast FY19–22 revenue CAGR of 42% (pre-acquisitions), CentralNic trades on an FY21e P/E of 13.1x and 8.5x FY21e EV/adjusted EBITDA, a material discount to its peers. The company should benefit from increasing operational leverage as it scales.
Q320 results
Strong top-line growth, margins lower on business mix
9M20 revenue increased by 118% to US$168.5m (Q1-Q319: US$77.1m), driven by contributions from the four acquisitions made in H219, Team Internet, Ideegeo, Hexonet and TPP Wholesale, with gross profit increasing by 74% to US$53.3m (Q1–Q319: US$30.6m). Gross margins reduced from 40% to 32%, reflecting the change in business mix with margins maintained for each individual segment (the contribution from Team Internet raised the group’s revenues and absolute EBITDA, but depressed group margins). Adjusted EBITDA increased by 68% to US$22.1m (Q1–Q319: US$13.1m), a margin of 13.1% down from 18.6% in the first nine months of 2019. Operating profit increased to US$1.9m (Q1–Q319: US$0.1m). The group reported adjusted EPS of 6.7 cents (Q1–Q319: 5.5 cents).
Net debt stood at US$44.9m (gross debt of US$108.6m, cash of US$63.6m) versus US$35.9m (gross debt of US$54.9m, cash of US$19.0m) following CentralNic’s recent share placing raising net proceeds of US$37.3m, but before payment of the US$36m for the acquisition of Codewise.
Interview with Ben Crawford, CEO of CentralNic
In the embedded interview below (Exhibit 1), CentralNic’s CEO Ben Crawford discusses the group’s Q320 trading update, touching on the US$36m acquisition and successful integration of Codewise, which completed on 31 October 2020. He also highlights the group’s resilient trading performance over the course of 2020, despite the impact of COVID-19.
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Exhibit 1: Ben Crawford, CEO – Q320 trading update |
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Source: Edison Investment Research |
Q1–Q320 pro forma organic growth of 17%
Alongside its Q320 results, CentralNic also provided pro forma analysis of its results, adjusting the 2019 comparable figures for the four acquisitions in H219, to show the financial position as if the four businesses had been owned throughout 2019. This highlights organic revenue growth of 17%, 10% growth in gross profits and 4% growth in adjusted EBITDA. The reduced pro forma gross margin from 34.4% to 32.5% and adjusted EBITDA margin from 14.7% to 13.1% is principally due to the exceptional growth of the (lower margin) Monetisation segment outgrowing the remainder of the group. However, there was some additional margin erosion in the Direct segment (discussed below) which management is confident will reverse in coming periods.
Operational highlights
Operationally, CentralNic has demonstrated continued organic growth despite the impact of the COVID-19 pandemic, with business continuing uninterrupted and with all teams and systems fully operational. CentralNic reported increased growth rates for Wholesale and Monetisation, with Team Internet driving a significant proportion of the strong performance in the period, through the rollout of its patented SSL monetisation solution. The group also successfully completed its share placing in September (US$37.3m net proceeds) and announced the conditional acquisition of Codewise, which completed on 31 October 2020.
Segmental analysis: Indirect, Direct and Monetisation
Following its transformational acquisitions in FY19, the group reorganised around three segments: 1) Indirect, replacing the Reseller division and incorporating CentralNic’s wholesale and registry business selling to domain name retailers; 2) Direct (the former Small Business and Corporate segments), retailing domain names and value-added services direct to businesses; and 3) Monetisation, the new domain monetisation business for domain investors acquired with Team Internet and including Codewise for future periods.
We outline the segmental performance below:
■
Indirect: Revenues in the Indirect segment rose by 51% to US$63.5m (Q1–Q319: US$41.9m), largely driven by a full contribution from the H219 acquisitions of TPP Wholesale and Hexonet Group. On a pro forma basis, the segment saw 8% organic growth.
■
Direct: Revenue fell 9% to US$32.1m (Q1–Q319: US$35.1m) principally due to three factors: 1) the 2018 tightening of the segment’s contract terms, leading to a reducing revenue impact into FY22; 2) the reallocation of the data centre business to the Indirect segment; and 3) the reallocation of the monetisation activities to the Monetisation segment. This was partly offset by the contribution of Ideegeo. Nevertheless, on a pro forma basis, the segment saw a 2% fall in organic growth, but with a healthy pipeline of prospective clients, management is confident of a return to growth.
■
Monetisation: Pro forma revenues grew by 39% US$72.9m (Q1–Q319: US$52.4m) driven by a 36% increase in the average yield (RPM). Factors behind this growth include: improved traffic quality following a review of the publisher base; the rollout of Team Internet’s patented SSL monetisation technology; and a 2% increase in page visits.
M&A: Earn-out payments highlight successful acquisitions
As a key plank of CentralNic’s M&A roll-up strategy, management has shown that it is able to successfully integrate major acquisitions and deliver strong growth, with payment of performance-based deferred consideration and earn-outs indicative of a successful acquisition strategy. The acquired businesses all demonstrate similar characteristics, namely high levels of recurring revenue and attractive cash conversion, meaning that recurring revenue and cash conversion are expected to remain in line with the long-term trend.
Following the final earn-out for Team Internet of €2.7m in June, in Q320 the group paid €1.3m in deferred cash consideration for SK-NIC in July, with a maximum of €1.7m payable in subsequent years. Final deferred consideration of €2.7m was paid for Hexonet in August, with 3.2m new shares issued and final deferred cash consideration of €0.45m was paid for GlobeHosting in August 2020. Post period-end, US$2.2m was paid for KeyDrive’s earnout, 15% in cash and 85% in equity, with 1.7m shares issued; a maximum further US$1.4m may still be payable.
Management has stated that it has a full pipeline of potential deals, with net debt sustainable (Q320: adjusted net debt of US$80.9m) in the context of group profitability and the expected contribution from recent acquisitions.
US$36m acquisition of Codewise
CentralNic completed the acquisition of Codewise for US$36m in cash on 31 October 2020, funded by its £30m share placing. Codewise is a monetisation and digital marketing group, with two principal businesses: Zeropark (an online ad-exchange connecting advertisers with domain investors/publishers) and Voluum (SaaS analytics, measurement, optimisation and media buying). CentralNic has taken on all of Codewise’s employees (140 staff, based in Krakow, Poland), including its development team to deepen CentralNic’s talent pool. Codewise has similar characteristics to CentralNic, including operating a subscription model, high recurring revenues and near 100% cash conversion.
The Q320 results do not include the impact of the acquisition of the Zeropark and Voluum businesses, which completed post period end.
Outlook: Management confident for FY20
On the basis of the group’s performance ytd and its resilience in the face of the COVID-19 pandemic, management remains confident in the outlook for FY20, given the group’s high recurring revenues (c 99% of total revenue base), strong cash conversion (annual subscriptions paid in advance provide near 100% pre-tax cash conversion), continuing organic growth and a full pipeline of potential future deals in what is a large, globally fragmented and growing market.
New revenue streams brought into the group through acquisitions provide significant upside potential through the growth of services such as hosting, cybersecurity and brand protection. Already more than 45m domains use at least one of CentralNic’s platforms (c 13% of domains worldwide). The group should benefit from increasing operating leverage, with EBITDA margins improving as the business scales.
Exhibit 2: Financial summary
US$'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 (‘000s) |
127,515 |
175,084 |
208,112 |
233,738 |
233,738 |
||
EPS - basic normalised (c) |
|
|
5.83 |
8.16 |
5.58 |
8.67 |
9.18 |
EPS - diluted normalised (c) |
|
|
5.56 |
7.92 |
5.44 |
8.48 |
8.97 |
EPS - basic reported (c) |
|
|
(5.03) |
(3.25) |
(1.09) |
2.87 |
3.35 |
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 |
||
Adj. 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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Research: TMT
EQS is acquiring Danish-based Got Ethics, a (profitable) SaaS provider of whistle-blowing solutions, to add to its own offering in the segment, for €10m. This should enable the group to build market share across Europe more rapidly ahead of the implementation of the EU whistle-blower directive in 2021. The vendors are staying with the enlarged group, with completion expected in Q121. Our FY21 estimates are lifted, with revenue up 5.6% and EBITDA rising from €5.3m to €6.1m. The share price is up 125% year-to-date, yet the valuation remains around 35% of larger peers based on FY19–21e average EV/sales. P/E and EV/EBITDA multiples are currently inflated by the extra marketing spend.
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