CentralNic Group plc (LON:CNIC), has provided a trading update confirming that trading for the year to December 2016 was in line with market expectations. Revenue increased by over 110% to £22.1m (Zeus £22.3m), with recurring/subscription revenues increasing to c.80% of overall revenues, from 67% in FY15. Adj. EBITDA increased by over 65% to £5.5m (Zeus £5.7m), while the company ended the year with £7.3m net cash (Zeus £7.0m). Trading so far in the new year is in line with expectations. Management are confident in the outlook as increased renewal revenues are expected in FY17 as the base of domains due to renew or expire has increased to c.10m in the Wholesale business (2016: 3.3m) and c.1.3m in the Retail business (2016: 0.7m). Trading on 5x EV/EBITDA for next year the shares are extremely good value versus the two listed peers GoDaddy and Verisign.
Continues to deliver on strategy with consistent YoY growth in revenues and adj. EBITDA since IPO in Sep 2013. CentralNic’s strategy has focussed on increasing its scale and scope of operations as well as on acquisitions, underpinning growth. The strategy includes developing and operating scalable software platforms, identifying and exploiting high growth areas of the domain industry, winning and retaining well-resourced partners and executing earning accretive acquisitions. The Retail division, for example, boosted by the Instra acquisition, has helped increase recurring/subscription revenues to c.80%.
Wholesale division retains number one position in new gTLDs. As per ntldstats.com (6th March 2017), CentralNic has a 32.4% market share of new gTLDs, with .xyz in the number one spot with 23.2% or 6.6m domains sold. New gTLDs are the fastest growing category of domain names, rising from 11m at the beginning of 2016 to over 27m by the beginning of 2017. There are also excellent prospects for future growth thanks to the MIIT accreditation for four domains distributed by CentralNic in China, including .xyz, as announced on 7th December 2016, as well as the large base of domains up for renewal this year.
As previously stated our forecasts could prove to be prudent. For example, in the Wholesale business, although the scale of renewals is yet to emerge, of the 6.6m .xyz domains, for every 1% that renew, CentralNic receives over £0.1m in EBITDA (based on current renewal prices). Initial renewal rates for .xyz and other new TLDs launched over the last 2 years are encouraging.
Valuation. The group are trading on an EV/EBITDA of 5.0x to Dec 17, and P/E of 11.7x, a significant discount to its peers. Given the growth prospects of the business, coupled with the strong operating cash flow characteristics, the impressive track record being built by management via successful acquisitions and the diversification of the business, we feel the shares offer investors a value opportunity given the industry backdrop, where CentralNic’s listed peers are typically capitalised in the billions of dollars.
CentralNic Group PLC CEO Ben Crawford said: “Following the rapid scaling up of our operations in 2016, we have made a pleasing start to 2017. We have additional sales resources, new licences to help grow our business in China, new TLDs launching and opportunities to sell software licenses and enterprise services.
With support from our investors, we look forward to continuing the evolution of our business in 2017, scaling up to meet the demand for domain name services as it grows globally.”
