CentralNic Group — Delivering on its growth model

Team Internet Group (AIM: TIG)

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Research: TMT

CentralNic Group — Delivering on its growth model

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.

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Written by

TMT

CentralNic Group

Delivering on its growth model

Q320 results update

Software & comp services

2 December 2020

Price

89.0p

Market cap

£208m

US$1.28/£

Adj. net debt (US$m) at 30 September 2020

80.9

Shares in issue (post-placing)

233.7m

Free float

68.7%

Code

CNIC

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

20.3

(0.6)

51.7

Rel (local)

6.0

(9.5)

69.4

52-week high/low

95.0p

40.0p

Business description

CentralNic is a leading provider of global domain name services, operating through three divisions: Indirect (wholesale, registry); Direct (SME, corporate); and Monetisation. Services include domain name reselling, hosting, website building, security certification and website monetisation.

Next events

FY20 trading update

February 2021

FY20 results

April 2021

Analyst

Richard Williamson

+44 (0)20 3077 5700

CentralNic Group is a research client of Edison Investment Research Limited

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*
(US$m)

EPS*
(c)

DPS
(c)

P/E
(x)

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.

Exhibit 1: Ben Crawford, CEO – Q320 trading update

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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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.

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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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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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EQS Group — More whistle-blowing

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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