CentralNic Group – are these shares too cheap after profit update?

Last Monday’s Q1 2022 Trading Update and Outlook report from this global internet platform group was a very strong pointer of even better times ahead.

This operator really is a money machine, and it would be totally wrong to ignore its potential over the next few years.

What is more its shares look very undervalued, especially considering the high-priced rubbish elsewhere in the market.

Yet another Profits Upgrade

Even though the group has only just completed its first three months of its trading year, its management is confident enough in materially upgrading market estimates for the rest of the year – which in turn bodes very well for the next few years as well.

It appears that the company’s Online Marketing division has helped to boost the numbers. Particularly the company is doing well from the benefits in gaining market share while it is in market trend for advertising solutions which identify and refine consumer purchasing intent, without third party cookies.

“While the Directors are cognisant of the current global macro-economic environment, they now have confidence that the group will materially exceed the most recent market expectations for the year.”

The company has had a very strong start to the year, with organic growth year-on-year reaching a record 51%, helping it gain market share in a growing market.

It is well worth noting that the group has upgraded revenue guidance six times and EBITDA four times since the start of last year – to my knowledge that is unique in our market.

The Business

Just to remind you what CentralNic does as a business.

The group, which was set up in 1996, operates through two main divisions – Online Presence and Online Marketing.

It drives the growth of the global digital economy by developing and managing online marketplaces allowing businesses globally to buy subscriptions to domain names for websites and email, to help monetise their websites, and to acquire customers online.

The company provides the essential tools for businesses to go online.

Its services include hosting domains, reselling domain names, the building of internet websites, security certification for websites and, of course, their monetisation.

The company’s Online Presence segment also provides computer software channels, as well as strategic consultancy and related services.

The Online Marketing segment offers advertising placement services for domain name owners, content website operators, and e-commerce website operators.

It also provides social marketing, search engine marketing advertising, and display advertising services

Both Organic and Acquired Expansion

The group’s core growth strategy is in identifying and acquiring cash-generative businesses in its industry with annuity revenue streams and offering exposure to growth markets before migrating them onto its own software and operating platforms. 

The recently oversubscribed equity Placing and tap bond issue has shown significant institutional following and approval of the management’s strategies.

This group has been extremely sensible in its acquisition policy, while its organic push has been more than impressive.

It is now a market leader in two high growth markets – digital advertising and domain name management.

ARR growth continuing apace

Both divisions generate reliable revenue streams based upon subscription income and from serving a diversified customer base.

And you know just how much I love to see annual recurring revenues (ARR), so too do all Finance Directors that I know. It makes for high income visibility upon which cashflow can be predicted and thereby enable operating leverage, especially for an acquisitive group.

Edison Investment Research state that the group’s revenue recurring products contribute over 99% of total gross revenues, while its cash conversion rate is over 100%.

Broker’s View

Analyst Bob Liao at the group’s NOMAD and joint broker, Zeus Capital, has upped all of his estimates.

He now goes for $573.4m of revenues for this year, EBITDA of $67.0m, a pre-tax profit of $54.2m and earnings of 16.5c per share.

For next year, assuming no further acquisitions are made between now and the end of 2023, which is totally unlikely, Liao goes for $607.3m revenues, EBITDA $72.3m, $60.6m pre-tax profits and 17.8c in earnings, which easily covers a dividend of 0.8p per share.

For 2024 he estimates $643.4m revenues, $76.1m EBITDA, $64.8m profits, 19.1c earnings and a 1.8p per share dividend.

The group will be announcing its Q1 interim report on Monday 23 May, which is when we could expect another Update on its current year prospects.

Its half-year report will be due in July.

That leaves plenty of scope for further upgrades

My View

I really like this group – as I stated earlier on – it is ‘a money machine’.

It is totally undervalued, trading on just 10 times its price-to-earnings ratio estimated for 2022.

That rating should be at least 50% higher, if not a great deal more.

Zeus Capital suggest that its valuation is 195p a share, compared to last night’s closing level of 125.50p.

That closing price was subsequent to over 5.1m shares having been traded on the day, and that was in excess of twelve times the average daily dealing volume.

That was also more than the highest level of last year, when on 7 September a large stake changed hands.

These shares are for buying, and even for adding if you are already a holder – that is because they are destined to soon break above 153.77p, which was their peak of last November.

Ignore this company at peril to your portfolio – yes, I really do ‘nap’ this stock.

(Profile 12.07.21 @ 89p set a Target Price of 110p*)

(Asterisks * denote that Target Prices have been achieved since Profile publication)