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Research: TMT
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.
Written by
CentralNic Group |
Fine-tuning the growth engine |
H123 results |
Software and comp services |
16 August 2023 |
Share price performance
Business description
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Analysts
CentralNicCentralNic Group Group is a research client of Edison Investment Research Limited |
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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 |
Revenue (US$m) |
Adj EBITDA* |
PBT* |
Diluted EPS* |
EV/EBITDA |
P/E |
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.
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Exhibit 1: CentralNic’s extensive brand portfolio |
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|
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.
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Exhibit 2: Adjusted EBITDA to net revenue progression, FY21–Q223 |
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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
|
|
Research: Investment Companies
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.