CentralNic Group — Fine-tuning the growth engine

Team Internet Group (AIM: TIG)

Last close As at 02/03/2024

GBP1.35

0.60 (0.45%)

Market capitalisation

GBP350m

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Research: TMT

CentralNic Group — Fine-tuning the growth engine

CentralNic’s H123 results showed continuing revenue growth and margin expansion, with growth now being driven more organically and across both operating segments. Partnerships could be key to unlocking growth from underutilised brands, with management winning several notable deals during the period. Our operational forecasts remain unchanged, with increases in EPS and net debt reflecting the recent £30m uplift to the share buyback programme. We believe that the current rating does not reflect the company’s cash generative mode and diverse growth prospects.

Max Hayes

Written by

Max Hayes

Associate Analyst

TMT

CentralNic Group

Fine-tuning the growth engine

H123 results

Software and comp services

16 August 2023

Price

131p

Market cap

£362m

US$1.27/£

Net debt (US$m) at 30 June 2023

68.2

Shares in issue

277.5m

Free float

46.5%

Code

CNIC

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

3.8

15.8

5.8

Rel (local)

4.3

21.5

8.8

52-week high/low

159p

109p

Business description

CentralNic Group is a global internet company that derives recurring revenue from privacy-safe, AI-based customer journeys that help online consumers make informed choices, as well as from the distribution of domain names.

Next events

Capital Markets Day

4 September 2023

Analysts

Max Hayes

+44 (0)20 3077 5700

Dan Ridsdale

+44 (0)20 3077 5700

CentralNicCentralNic Group Group is a research client of Edison Investment Research Limited

CentralNic’s H123 results showed continuing revenue growth and margin expansion, with growth now being driven more organically and across both operating segments. Partnerships could be key to unlocking growth from underutilised brands, with management winning several notable deals during the period. Our operational forecasts remain unchanged, with increases in EPS and net debt reflecting the recent £30m uplift to the share buyback programme. We believe that the current rating does not reflect the company’s cash generative mode and diverse growth prospects.

Year
end

Revenue (US$m)

Adj EBITDA*
(US$m)

PBT*
(US$m)

Diluted EPS*
(c)

EV/EBITDA
(x)

P/E
(x)

12/21

410.5

46.3

31.9

10.9

11.4

15.1

12/22

728.2

86.0

64.3

21.4

6.1

7.7

12/23e

833.7

94.4

80.7

21.1

5.6

7.8

12/24e

909.6

103.0

89.3

24.7

5.1

6.7

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

Organic business refined and driving growth

CentralNic’s H123 results were in line with the H1 update, reporting 18% revenue growth and margin expansion. On a pro-forma basis revenue was up c 31% organically over the last 12 months. Online Marketing (77% of group revenue) was up 18% year-on-year to US$304.4m, driven by 49% traffic growth (trailing 12 months). The segment benefited from the full period impact of the VGL acquisition, which made its first international expansion into France. Online Presence reported a 20% year-on-year increase in revenues to US$92.0m, which is encouraging given that growth has been in the single digits in recent years. The reorganisation of the business to autonomise Online Presence has unlocked faster growth, helping to better monetise its large portfolio of top-level domains.

Clear strategy for sustainable long-term growth

Currently only a concentrated portion of CentralNic’s brand portfolio drives growth. Management sees partnerships as crucial to unlocking organic growth from its underutilised assets, and it secured key partnerships with notable names such Sovrn, Klarna, Booking.com and Shopify in the period. In Online Presence, it has partnered with Crown Commercial Services to support the UK government’s domain infrastructure. Management believes its Online Marketing business can capitalise on the growing social commerce market, which it forecasts will reach $80bn in sales by 2025, as social media and e-commerce giants vertically integrate into this space. Additionally, the company is aiming to better integrate operations to reduce consumer friction, potentially improving margins through operating leverage.

Valuation: Upside potential remains

On a EV/EBITDA basis, CentralNic trades at an average discount to peers of 22% across FY1e and FY2e. We believe the current rating does not reflect the growth prospects of the business, its increasingly diverse business mix and cash generative model. In addition, the share price does not yet fully factor in the impact of its share buyback programme.

Partnerships and integrations underpin strategy

Currently, only a small portion of CentralNic’s large portfolio of brands (see Exhibit 1) is driving overall growth, namely the TONIC platform (seeks to convert general interest social media users into high-intent consumers) and VGL (product review portal). Management sees partnerships as key to unlocking the potential organic growth of these businesses. During the period, the company won several deals with notable names, including Sovrn, Klarna, Booking.com and Shopify. Recent progress with TONIC’s Microsoft Bing partnership, in addition to VGL’s French expansion, indicate that there is also strong momentum among its flagship brands.

Exhibit 1: CentralNic’s extensive brand portfolio

Source: CentralNic

Over the long term, management has identified several market trends that should support continued top-line growth and margin expansion.

The first is the growing trend towards social e-commerce, illustrated by social media giants like Meta and TikTok expanding into commerce and Amazon attempting to move to social media. The company’s current marketing capabilities in social media makes it well placed to capture this trend, where management believes the market could reach sales of US$80bn by 2025.

Secondly, the company is aiming to better combine its business units to provide fewer steps and less friction for consumers. This optimisation may also lead to improved operating leverage, which could support further margin expansion.

CentralNic is also investing in its AI capabilities, which have already led to higher conversion rates and sales efficiency, according to management. These include creating an innovation hub and an internal AI Academy, supporting further technological advancements to its product portfolio.

H123 results and changes to forecasts

CentralNic’s H123 results were in line with its July trading update, reporting gross revenue of US$396.4m (+18% y-o-y), net revenue of US$91.2m (+11% y-o-y) and EBITDA of US$44.6m (+15% y-o-y, 48.9% EBITDA/net revenue margin). As shown in Exhibit 2, the company has been building operating leverage, illustrated by gradual margin expansion, which we have factored into our forecasts.

Exhibit 2: Adjusted EBITDA to net revenue progression, FY21–Q223

Source: CentralNic Group

Online Marketing: Key growth engine continues to deliver

Online Marketing continues to be the group’s primary revenue source, with revenues increasing by 18% y-o-y to US$304.4m (77% of total revenue). Performance was driven by an increase in traffic, with visitor sessions increasing by 49% over the last 12 months (LTM). Organic growth of 36% LTM has been driven by its TONIC platform. Total group growth in the period also benefited from the full period impact of the VGL acquisition, which made its first international expansion into France with meilleurs.fr. France is its main trading partner and Amazon’s second largest European market, providing a significant organic growth opportunity. Management believes it can expand into other markets at a higher cadence now that the first expansion is complete.

Online Presence: Reorganisation supports faster growth

The Online Presence segment reported a 20% increase in revenues to US$92m, which is encouraging given that growth has been in the low single digits in recent years. The reorganisation of the business to autonomise Online Presence has unlocked faster growth, with management believing the separate entity has enabled it to better monetise its large portfolio of ‘exotic’ top-level domains.

Exhibit 3: Changes to forecasts

31 December

FY23e

FY24e

US$'000

Old

New

Change

y-o-y

Old

New

Change

y-o-y

Gross revenue

833,705

833,705

-

14%

909,572

909,572

-

9%

Net revenue

190,585

190,585

-

7%

208,116

208,116

-

9%

Adjusted EBITDA

94,416

94,416

-

10%

103,017

103,017

-

9%

Profit Before Tax (norm)

80,720

80,720

-

26%

89,307

89,302

(0.0)%

11%

Profit Before Tax (reported)

19,623

38,623

96.8%

161%

37,210

47,205

26.9%

22%

Net income (normalised)

58,118

58,118

-

1%

64,301

64,297

(0.0)%

11%

Basic average number of shares outstanding (m)

286

273

284

257

EPS - basic normalised (c)

20.31

21.29

4.8%

(1)%

22.68

25.00

10.2%

17%

EPS - diluted normalised (c)

20.13

21.09

4.8%

(1)%

22.47

24.75

10.1%

17%

Revenue growth (%)

14.5

14.5

9.1

9.1

Gross Margin (%)

22.9

22.9

22.9

22.9

Adjusted EBITDA margin (%)

11.3

11.3

11.3

11.3

Adjusted EBITDA/net revenue (%)

49.5

49.5

49.5

49.5

Capex

(5,667)

(5,667)

-

(13)%

(5,819)

(5,819)

-

3%

Closing net debt/(cash)

28,134

58,968

109.6%

4%

(22,313)

9,914

N/A

N/A

Source: Edison Investment Research

We leave our normalised operational forecasts materially unchanged. Our reported profit before tax has been updated to reflect CentralNic’s deferred consideration accounting treatment more accurately in the income statement.

Our expectations currently indicate that CentralNic completes the full share buyback programme of 28.9m shares before year end, leading to an uplift in our earnings per share. As of 14 August, the company had bought back 8.6m shares for a gross value of £10.3m, indicating that it is on track to complete the programme before year end.

On 3 July, CentralNic announced a £30m uplift to the programme (first announced on 15 May), analysed in our H123 update note. We believe the uplift will drive a US$30.8m increase in our end-FY23e net debt expectation of US$59.0m. That said, this is well covered by our FY23 free cash flow forecast of US$83.8m, which also covers an estimated US$18.6m of deferred consideration. We note that a large share of the planned cash outflows for the year were paid in H1, including US$15.2m of CentralNic’s deferred consideration and dividends of US$3.7m. We believe the combined cash cost of its two share buyback programmes and the shares bought for its Employee Benefit Trust will be US$47.5m for the year.

We note that our FY23 year-end net debt forecast is 13% lower than the net debt position at end-H123 and 0.6x our EBITDA expectation for the year, substantially below management’s ceiling of 2x.


Exhibit 4: Financial summary

$'000s

2020

2021

2022

2023e

2024e

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

240,012

410,540

728,237

833,705

909,572

Cost of Sales

(164,894)

(292,041)

(550,541)

(643,120)

(701,456)

Gross Profit

75,118

118,499

177,696

190,585

208,116

EBITDA

 

 

29,394

46,251

86,024

94,416

103,017

Normalised operating profit

 

 

27,310

42,737

83,045

90,839

99,115

Amortisation of acquired intangibles

(13,747)

(18,291)

(36,399)

(36,399)

(36,399)

Exceptionals

(10,529)

(7,087)

(7,395)

0

0

Share-based payments

(5,113)

(5,006)

(5,698)

(5,698)

(5,698)

Reported operating profit

(2,079)

12,353

33,553

48,742

57,018

Net Interest

(9,834)

(10,798)

(18,736)

(10,120)

(9,813)

Joint ventures & associates (post tax)

79

0

0

0

0

Exceptionals

0

0

0

0

0

Profit Before Tax (norm)

 

 

17,555

31,939

64,309

80,720

89,302

Profit Before Tax (reported)

 

 

(11,834)

1,555

14,817

38,623

47,205

Reported tax

975

(5,097)

(16,895)

(25,023)

(27,684)

Profit After Tax (norm)

14,044

25,551

57,414

58,118

64,297

Profit After Tax (reported)

(10,859)

(3,542)

(2,078)

13,599

19,521

Minority interests

0

0

0

0

0

Net income (normalised)

14,044

25,551

57,414

58,118

64,297

Net income (reported)

(10,859)

(3,542)

(2,078)

13,599

19,521

Basic average number of shares outstanding (m)

197

227

266

273

257

EPS - basic normalised (c)

 

 

7.14

11.24

21.61

21.29

25.00

EPS - diluted normalised (c)

 

 

6.86

10.91

21.41

21.09

24.75

EPS - basic reported (c)

 

 

(5.52)

(1.56)

(0.78)

4.98

7.59

Dividend (c)

0.00

0.00

0.01

0.01

0.01

Revenue growth (%)

119.8

71.0

77.4

14.5

9.1

Gross Margin (%)

31.3

28.9

24.4

22.9

22.9

EBITDA Margin (%)

12.2

11.3

11.8

11.3

11.3

EBITDA/Net Revenue (%)

39.1

39.0

48.4

49.5

49.5

Normalised Operating Margin

11.4

10.4

11.4

10.9

10.9

BALANCE SHEET

Fixed Assets

 

 

270,578

271,830

365,062

351,263

328,864

Intangible Assets

255,716

254,169

347,938

334,139

311,740

Tangible Assets

8,677

8,601

7,358

7,358

7,358

Investments & other

6,185

9,060

9,766

9,766

9,766

Current Assets

 

 

77,606

128,391

193,650

206,090

255,537

Stocks

1,011

895

646

1,938

2,114

Debtors

47,941

71,363

98,231

111,922

112,139

Cash & cash equivalents

28,654

56,133

94,773

92,230

141,284

Other

0

0

0

0

0

Current Liabilities

 

 

96,421

137,129

197,712

216,865

219,479

Creditors

89,256

117,016

190,348

209,631

212,245

Tax and social security

0

0

0

0

0

Short term borrowings

5,819

18,276

5,456

5,326

5,326

Lease liabilities

1,346

1,837

1,908

1,908

1,908

Long Term Liabilities

 

 

137,867

149,110

193,667

205,172

207,851

Long term borrowings

107,820

119,251

145,872

145,872

145,872

Other long term liabilities

30,047

29,859

47,795

59,300

61,979

Net Assets

 

 

113,896

113,982

167,333

135,316

157,071

Minority interests

0

0

0

0

0

Shareholders' equity

 

 

113,896

113,982

167,333

135,316

157,071

CASH FLOW

Op Cash Flow before WC and tax

3,997

23,360

54,195

78,598

87,506

Working capital

4,129

4,091

7,245

4,299

2,222

Exceptional & other

14,526

15,804

24,434

15,818

15,511

Tax

(1,957)

(2,230)

(8,399)

(13,518)

(25,005)

Net operating cash flow

 

 

20,695

41,025

77,475

85,197

80,235

Capex

(4,259)

(4,810)

(6,543)

(5,667)

(5,819)

Acquisitions/disposals

(37,065)

(18,344)

(81,396)

(18,600)

(10,000)

Interest paid

(9,512)

(8,695)

(7,766)

(10,120)

(9,813)

Equity financing

34,667

0

58,187

(47,460)

0

Change in borrowing

1,563

24,721

34,691

0

0

Dividends

0

0

0

(3,652)

(3,465)

Other

(4,734)

(3,700)

(30,730)

(2,241)

(2,083)

Net Cash Flow

1,355

30,197

43,918

(2,543)

49,054

Opening net debt/(cash)

 

 

74,998

84,985

81,394

56,555

58,968

FX

1,117

(2,718)

(5,278)

0

0

Other non-cash movements

(12,459)

(23,888)

(13,801)

130

0

Closing net debt/(cash)

 

 

84,985

81,394

56,555

58,968

9,914

Source: Edison Investment Research, company accounts


General disclaimer and copyright

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 £60,000 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.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

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General disclaimer and copyright

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 £60,000 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.

Copyright: Copyright 2023 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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London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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Atlantis Japan Growth Fund — Combination with NAVF offers benefits for all

The Atlantis Japan Growth Fund (AJG) board has announced that it has agreed heads of terms for a proposed combination of its assets with those of Nippon Active Value Fund (NAVF). The proposal is intended to address AJG’s relatively small size – current assets under management (AUM) total c £78m ¬– and follows recent disappointing relative performance. The combination, which is subject to the approval of the shareholders of both AJG and NAVF, offers AJG shareholders ongoing exposure to the attractive investment opportunities available in the Japanese market, especially among cash-rich smaller companies. They may also benefit from the expertise of NAVF’s managers. NAVF has been the top-performing Japanese fund since its inception in February 2020 and its managers have over 30 years’ experience as active managers in this market. The proposal also includes the option for AJG’s shareholders to realise a portion of their cash if desired. The enlarged NAVF will offer all shareholders greater liquidity, as well as a likely reduction in ongoing costs.

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