CentralNic Group’s growth has accelerated in Q1 and Q2 says Zeus Capital

CentralNic Group plc (LON:CNIC) announced a highly accretive acquisition of a publishing network. The acquisition should add reliable revenue, expand margins and increase market share for the Online Marketing division. We increase 2022 EPS by 3%.

Overview: CentralNic announced the acquisition of a publishing network for $6.5m in cash and assumed liabilities. The publishing network generates advertising revenue from a broad range of websites that attracts a steady stream of organic traffic. CentralNic currently places ads for the web properties and charges a percentage for the ad revenues that it generates. CentralNic already owns other web properties and this acquisition represents further vertical integration. The network of websites will be integrated into the company’s Online Marketing division and the transaction is expected to close around 1 October.

Strategic rationale: The acquisition enhances margins and adds a reliable revenue and profit stream. At the same time, vertical integration locks in a customer and increases market share. The publishing network currently uses competing ad networks for about half of its revenues that CentralNic Group plans to substitute.

Financial rationale: The acquisition is expected to highly accretive immediately. The websites on a standalone basis are expected to generate at least $2.0m in revenue and $1.5m in EBITDA, resulting in an acquisition multiple of only 4.3x EBITDA, well below half CNIC’s 2021 EV/EBITDA multiple. We raise 2022 revenue by only $1.0m, due to the elimination of intercompany revenues, and 2022 EBITDA by $1.5m. We raise our 2022 Adjusted EPS by 4%. The company expects to make further accretive acquisitions of publishing networks alongside other acquisitions, which should drive margins and recurring revenues higher.

Valuation: CentralNic Group’s organic revenue growth has accelerated in Q1 and Q2. We see this potentially leading to profit upgrades as we approach the end of the year. Longer term, we expect more of top line growth to translate to profit growth as the company’s investment levels plateau. As a result, we see an increasingly strong profit growth profile over the short and longer term. We believe this outlook is not reflected in CentralNic’s earnings multiples, which appear to assume marginal growth. Shares trade at only 11x our conservative 2021 EBITDA estimates and 7% FCFF yield.

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