CentralNic Group “should be more growth and better value to come” says Edison Investment Research (LON:CNIC)

CentralNic Group plc (LON:CNIC) is the topic of conversation when Edison Investment Research’s Analyst Richard Williamson caught up with DirectorsTalk for an exclusive interview.

Q1: Can you tell us more about what CentralNic Group does?

A1: CNIC is a slightly unusual story in the UK market so there aren’t many companies directly comparable to it. What it does is it’s got two principal businesses, online presence and online marketing, and essentially what it is doing is providing the tools for businesses to go online.

So, in the online presence business, it sells domain names, subscriptions and other key elements to enable companies to go online and operate email and websites, as well as value added services such as reselling, hosting, website building and security certification.

On the online marketing side, the online marketing side is a relatively new business for the group, so they bought into this business about two years ago with the acquisition of Team Internet. What it does is it helps companies or investors monetize websites and what I mean by that is, essentially, companies and people who surf the internet go to certain websites and for that traffic, the company provides a way of monetizing that traffic to service investors of websites and owners of websites.

Q2: Now it seems like online presence has been growing strongly, but online marketing has been growing even more strongly. Do you think this growth can continue?

A2: Well, it has been a fascinating story. So, certainly over the course of FY20, looking at the organic growth figures, last year the company delivered organic growth of 9%, in Q1, I think it was up to 16%, in H1 it was 20%, and for the nine months, it was 29%.

So, it has been fascinating that essentially the company started an investment programme last year and investing circa $8/$9 million in the platform in essentially bringing the business together as well as strengthening the management team and staffing. That really does seem to have kicked into much higher growth in FY21 and set the company really on track for continued growth in the future.

So, I’m going to be slightly cautious here, but there certainly don’t appear to be any reasons why growth should slow down and the message that the company put out in the nine months results was very much that they expect this level of growth to continue for the remainder of the year. After that, it’s just a question of lack of visibility, but I don’t see any reason why there should be a massive step down in growth but let’s take it as it comes.

Certainly, the marketing side of the business is outgrowing the online presence side so that there is a disparity in growth there and as a result of that disparity in growth, I suppose online marketing is now, in revenue terms, the majority of the business, having only been acquired and added to the business at the back end of 2019.

So, there’s plenty of growth, strong growth across the business but particularly in online marketing and in a global advertising market that could well continue.

Q3: Over the years, the company had been very active on the M&A front, 2021 has been a little subdued in that respect. Do you think the buy and build model has changed at all?

A3: I think this is quite interesting, I suppose before 2021 investors were slightly nervous about the underlying health of the business and if they stopped doing M&A, what would that mean for the business? 2021 has lifted the veil and you can now see that the underlying organic growth is fantastic, and the business is continuing to perform strongly even without, again, there has been M&A but just a lower level of M&A.

So, even in 2021, the company has made three smallish acquisitions so following the large, multiple acquisitions made in 2019 and 2020 that’s a lower level of M&A, I don’t see any reason why M&A should not now continue. They operate in global markets and fragmented markets with the opportunity to acquire both in the domain names side of the business, as well as in the marketing side.

The company has net debt of about $79 million so in terms of leverage of about 15% and a net debt to EBITDA multiple of around 2/2.5/ 2.6 times so all told, I think that’s a very sustainable level of debt given the EBITDA, the cashflow that this business generates.

Early in ‘21, they secured shareholder approval for €150 million of bond issue and they’ve drawn €105 million of that so they’ve got €45 million still undrawn from that approval.

So, they are not over geared, they have debt headroom or headroom on the bond and of course, they have the potential for equity fundraising in the future. Potentially, particularly now the share price has ticked up so 6-12 months ago, the trading range was probably 80p to 100p and now they seem to have broken through a barrier and are up to about 140p to 150p, they may consider in the future that equity fundraising is something they will contemplate where previously everything has been debt funded.

Q4: CentralNic Group’s share price three months ago was just around £1 and now it’s trading over 145p. In your view Richard, should we consider these shares now expensive?

A4: The quick answer to that is no. The company trades on a PE multiple of about 16 times FY21 earnings and EV/EBITDA multiple of about 11/12 times. So, for the sort of levels of growth you’re getting here and our forecast for FY21 are 59% sales growth, and the company has generated a sort of revenue CAGR of about 78% over the last five years so this really is a high growth story.

The company is now at a point where it is gaining scale, still in the grand scheme of things, not large so market cap is about £300 million and £350 million pounds so there’s plenty of growth still to go.

I just feel that they have now achieved a level of credibility with investors, so I think there was a technical overhang 6-12 months ago that was subduing the share price, that has now been removed. The share price has moved to a new level, but with the growth set to continue, M&A set to continue and plenty of markets which they could consolidate and, dare I say it, a very attractive business model which is very sticky, high recurring revenues, fantastic cash conversion, they look well set for the future and to progress further from here.

So, I remain optimistic that there should be more growth and better value to come.

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