FY16 results show that CentralNic Group Plc (LON:CNIC) has delivered revenue of £22.1m (+113%), adj. EBITDA of £5.5m (+68%) and adj. PBT of £4.7m (+60%), in line with market expectations as announced at the March trading update. The successful acquisition of Instra in January for £18.6m contributed sales of £10.3m and adj. EBITDA of £2.2m, implying a multiple paid of c.8x, with improved performance expected this year. Recurring/subscription revenues also increased to 81% of overall revenues (2015: 67%). 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: 3.4m) and c.1.3m in the Retail business (2016: 0.7m). Trading on 5.0x EV/EBITDA to December 2017 with a FCF yield of 9.0%, in our view the shares remain extremely good value versus the two listed peers GoDaddy and Verisign.
Strategy for FY17 and FY18 focussing on acquisitions and building out Enterprise division. Following the successful acquisitions of Instra and Internet.bs, the business continues to actively pursue an acquisition strategy to enhance the product and services suite, and we note discussions are ongoing with the registry service provider for Slovakia. Two senior executives formerly of Group NBT (Netnames), have also been hired to drive growth initiatives in the Enterprise division in order to take reliance away from premium domain sales. Areas of online security and brand protection services for corporates have been identified as important potential recurring revenue lines for this division.
Wholesale division retains number one position in new gTLDs. As per ntldstats.com (8th May 2017), CentralNic has a 30.7% market share of new gTLDs, with .xyz in the number one spot with 21.6% or 6m domains sold. New gTLDs are the fastest growing category of domain names, rising from 11.2m at the beginning of 2016 to over 27.6m by the beginning of 2017, albeit this includes heavily discounted year one registration prices. There are also excellent prospects for future growth thanks to the MIIT accreditation for four domains distributed by CentralNic in China, including .xyz, as well as the large base of domains up for renewal this year.
Overall growth expected to slow in FY18 due to change in mix in Enterprise division as recurring revenues replace more one off premium domain sales. All revenue streams are expected to continue to grow in 2018 with the exception of premium domain sales, which are expected to reduce from £3.7m to c.£2.6m in FY17 and £0.5m in FY18, to be replaced by other Enterprise revenue opportunities including DomiNic. Group adj. EBITDA and PBT are therefore expected to be relatively flat YoY over FY17 and FY18, increasing from £6.5m and £5.6m to £6.6m and £5.8m respectively.
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 6.0m .xyz domains, for every 1% that renew, CentralNic receives over £0.1m in EBITDA (based on current renewal prices). Renewal rates for .xyz and other new TLDs will emerge in the coming months.
Zeus Capital Valuation. CentralNic is trading on an EV/EBITDA of 5.0x to Dec 17 dropping to just 4.2x in Dec 18, and P/E of 11.1x, a significant discount to its peers. Given the strong operating cash flow characteristics, impressive track record being built by management via successful acquisitions and the ongoing 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 also announced the appointment of Sarah Ryan as Group Corporate Development Director.
Sarah was formerly Director of International M&A for LexisNexis and Thomson Financial. In these roles, she led transaction due diligence and structured complex deal terms globally, including deals in the Middle East, Russia, China, India, South Africa and Europe. Sarah began her career at Merrill Lynch in Mergers & Acquisitions, where she advised companies in a myriad of sectors on strategic alternatives, and in Equity Capital Markets, where she marketed, priced and allocated IPOs, secondaries and convertible bond offerings. She has also consulted to a number organizations for due diligence, M&A and strategy projects. Sarah has an MBA in Finance, with honors, from the Wharton School of the University of Pennsylvania and a BA in Economics from Duke University.
CentralNic CEO Ben Crawford said: “With Mergers and Acquisitions playing a key role in our strategic plans moving forward, we are delighted to have an executive of Sarah’s calibre joining us in this key position.”
