Centralnic Group Plc (LON:CNIC) CEO Ben Crawford talks to DirectorsTalk about its latest interim results. Ben talks us through the highlights, talks about industry growth drivers, company strategy, the renegotiation of the dot XYZ contract, the rational behind the SK-NIC acquisition and how CentralNic compares to it’s peers.
Highlights:
· Adjusted EBITDA*, excluding forex gains and losses, of £1.4m (H1 2016: £0.9m) – up 50%
· Gross profit £3.0m (H1 2016: £2.3m) – up 29.5%
· Revenue of £10.6m (H1 2016: £8.9m) – up 19%.
· Net cash of £7.73m (2016: £6.04m).
* Adjusted EBITDA: Earnings before interest, tax, depreciation and amortisation, acquisition costs, exceptional items and non-cash charges.
Operational highlights:
· Recurring revenues continue to increase, reflecting the strong focus on growing the proportion of the Group’s revenues being of a recurring nature, as exemplified post period-end by the acquisition of SK-NIC in August 2017 and the renegotiated .xyz contract.
· Retail division focus on optimising marketing performance having completed integration and consolidation of Instra Group.
· Wholesale business maintained its lead in global market share by volume, being the only company which supports six of the Top 20 new Top-Level Domains.
· New client wins as a registry service provider included .rugby .observer, .storage, as well as multiple contracts with country code Top-Level Domains.
Post half year end highlights:
· Acquisition of SK-NIC:
– As announced on the 25th August 2017, the Group has agreed to acquire the business and assets of SK-NIC, the manager of the exclusive country code top-level domain for Slovakia, .sk.
– The Board believes that this represents a major, earnings enhancing acquisition, further increasing the proportion of the Group’s revenues that are recurring and diversifying the Group’s businesses.
– A term loan of £18m and overdraft facility of £3m are being provided by the Group’s bankers, Silicon Valley Bank (“SVB”), to fund the initial consideration.
Contract with .XYZ renegotiated: term extended to 2032, with CentralNic receiving a fixed fee based on the volume of .xyz registrations and subscriptions managed.
Commenting on the results, Mike Turner, Chairman of CentralNic, said: “Our underlying first half results have been most encouraging as CentralNic continues to deliver organic growth alongside significant earnings enhancing acquisitions.
“Both our organic growth and roll-up strategy are underpinned by a drive to increase the size and scale of the business by focussing on activities which will deliver recurring revenues and high visibility of earnings. This concentrates our efforts on the higher margin and higher growth segments of the market.
“In keeping with the consistently heavy second-half weighting of results in recent years, the Board is confident that the Company is on track to meet market expectations for the full year to 31 December 2017, as we continue to diversify through the acquisition of businesses with high-levels of recurring revenue, organically grow our existing recurring revenue businesses, and take advantage of opportunities to trade in valuable premium domain names.”
Zeus Capital
During the first six months of FY17, CentralNic delivered good underlying organic growth across the business as it continues to deliver against the long-term growth strategy of building recurring, high quality revenues. In terms of headline numbers, sales have increased by 18.5% to £10.6m (H1 16: £8.9m), while gross profit increased by 29.5% to £3.0m (H1 16: £2.3m), with margin increasing from 25.5% to 27.9%. Currency headwinds resulted in an FX loss of £0.3m versus a £0.4m gain in H1 16, and excluding this, adj. EBITDA increased 50% to £1.4m (H1 16: £0.9m) and adj. PBT by 79% to £1.0m (H1 16: £0.55m). Post period-end, the business demonstrated that it continues to diversify as a global internet software company with the transformational acquisition of SK-NIC that brings quality, high margin, recurring revenues to the Group, as well as the favourable renegotiation of the .xyz contract. In keeping with consistent H2 weighting, the business remains on track to meet full year market expectations.
18% growth within Retail and with full integration of Instra complete, focus now on optimising marketing spend. Sales from the Retail division grew by 18% to £8.0m from £6.8m, with Instra contributing the lion’s share with £5.8m, delivering 19% growth. Excluding FX headwinds, the Retail division delivered adj. EBITDA of £1.11m versus £1.06m in H1 16. With the integration and consolidation of key operations in Instra now complete, the business is now focussing closely on sales and marketing in order to drive retail growth performance.
Wholesale division maintains its lead of new TLDs globally with 22% market share, c.5.1m domain names. The Wholesale division generated revenue of £1.8m (H1 16 £1.6m) and EBITDA contribution of £0.55m (H1 16: £0.54m), excluding FX headwinds. The division continues to evolve reflecting demand for heavily promoted, low priced TLDs with high volumes offsetting lower per domain revenues. CentralNic supports six out of the top twenty new gTLDs from a total of c.1,225, while domain renewals now account for 18% of new TLD transaction volumes versus 2% in H1 16. Additional domain extensions won in the period include .rugby, .observer and .storage plus a ccTLD, whilst .art and .fun launched in H1.
Strategy to grow recurring revenues within Enterprise. The Enterprise division generated sales of £0.8m (H1 16: £0.5m) and adj. EBITDA of £0.22m (H1 16: loss of £0.05m), comprising a mix of recurring revenues and trading in premium domain names. Premium domain name sales contributed £0.36m in H1, and discussions relating to premium sales are ongoing and are expected to contribute significantly to profits in H2. Increasing recurring revenues is a key strategy of the division, as reliance on premium domain sales diminishes, and the company is preparing to offer corporate registrar and online brand protection services under the management of the new Commercial Director, a leading specialist in this area.
Valuation. CentralNic is trading on an EV/EBITDA of 10.8x to Dec 17 dropping to just 8.4x in Dec 18, and P/E of 13.0x. Given the strong operating cash flow characteristics, impressive track record being built by management via successful acquisitions and the continuing 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.