CentralNic Group – Heading From 115p To 130p And Beyond

In under two weeks we will be seeing the CentralNic Group (LON:CNIC) announcing its half year results.

The company describes itself as the global internet platform which derives recurring revenue from privacy-safe, Artificial Intelligence-based customer journeys that help online consumers make informed choices, as well as from the distribution of domain names. 

I am looking for the Interim accompanying statement to indicate that the company is continuing to grow both its revenues and its profitability in the current year to end December 2023 and then driving further ahead.

At the current 115p, trading on 7.25 times price/earnings, I consider that the group’s shares are extremely attractive in front of the Interims being published on Tuesday 18^th July.

I see them breaking through 130p fairly soon and then heading upwards again to trade in the 150p/160p price range.

Fast-Growing European business

In March it was declared that it had been recognised as one of the fastest-growing companies in Europe for the second year in a row, following the Financial Times’ seventh annual FT 1000 report.

The group was listed among the top-250 fastest-growing companies in the report published by the Financial Times in partnership with Statista, and among the top-50 fastest-growing Technology companies in Europe.

Impressive CAGR Of 78%

CentralNic has enjoyed a compound annual growth rate of 78% over the past 9 years, since its IPO on AIM Market in 2013, taking it from $4m in revenues to over $750m today.

In 2022 its organic growth was 60%, leading to an overall 77% revenue growth.

The Business

The London-based AIM-listed company is involved in driving the growth of the global digital economy, it does that by developing and managing online marketplaces allowing businesses globally to buy subscriptions to domain names for websites and email, helping to monetise their websites, and to also acquire customers online.

Its core growth strategy has been in identifying and acquiring cash-generative businesses in its industry with annuity revenue streams and exposure to growth markets and then migrating them onto the group’s software and operating platforms.

It provides tools to entrepreneurs, enterprises and Governments in virtually every country in the world enabling them to build, secure and monetise their own part of the internet.

The CentralNic Registry is a globally recognised registry services provider. It innovates and licenses its proprietary registry software while operating its own registry platforms.

It also empowers other registry operators to run independent platforms and powers a myriad of domain extensions including country code Top Level Domains, generic TLDs, second-level domain registries and brand TLDs.

The group’s flexibility is unrivalled, configuring a solution tailored to Registry Operator’s needs, ranging from software-only licences to complete registry management and distribution.

For over 27 years, the group’s robust in-house Domain Name System has powered domain extensions and assures the stability, security and resilience of the domain names supported by CentralNic.

On a sales per business basis its Online Marketing side accounted for 78.9%, while the Online Presence division was some 21.1%.

On a sales per region basis in the 2022 trading year, Europe accounted for 83.5% of sales, North America 9.0%, the UK 1.0%, while the Rest of the World takes in the 6.5% balance.

The market for its services is enormous, worth some $60bn for Online Presence, for domain names and e-mail, and $600bn for Online Marketing, for customer acquisition and traffic.

Continuing To Build Its Partnerships

CentralNic has partnered with Microsoft to provide it with access to Bing’s portfolio of advertisers, which should provide potential long-term upside as the company builds another high growth, traffic conversion business around Bing, while complementing its existing business with Google.

The group’s Online Marketing division is planning to introduce products to help it source traffic directly, while reducing its gross costs and thereby expanding its gross margins.

The same division has recently expanded its product comparison lead generation business to France, which is the second largest European market for Amazon, its key partner.

At the end of May the group announced that it had been selected as one of only two firms named as a supplier on Crown Commercial Service’s Network Services 3 framework under Lot 1d for Critical Domain Services.

The Crown Commercial Service is an Executive Agency of the Cabinet Office. It supports the public sector to achieve maximum commercial value when procuring common goods and services. 

That is seen as a significant milestone for the group, underlining its strategic trajectory and continued growth.

Big Share Buyback Programme

The group has declared that:

“Looking forward we will review our approach to cashflow deployment within the business and expect a greater focus on returns to shareholders versus M&A.”

That has previously allowed the company to successfully execute its mergers and acquisitions agenda, while at the same time improving its net debt position.

It was underway with its second £4m Share Buyback exercise for 2023 but a surprise announcement on Monday morning indicated that the group is jacking that up to a significant £34m or 10% maximum of its equity.

This has two effects – by reducing the number of shares in issue and thereby increasing the earnings per share in the process.

Max Royde And Kestrel Opportunities

As a matter of interest, as the group was engaged upon its buyback, its non-executive director Max Royde was also in the market for more stock.

Royde is currently managing partner at Kestrel Partners, an investment management company specialising in business-critical software companies.

He co-founded Kestrel Partners in 2009 and is a fund manager of Kestrel Opportunities.

Prior to Kestrel he was a managing director of KBC Peel Hunt, running its technology franchise.

He has over 20 years’ experience focusing on the technology sector.

Kestrel Partners holds 66,668,166 shares in CentralNic, representing a 23.57% stake and the biggest holding in the group’s equity.

Management Comment

CEO Michael Riedl stated that:

“We are excited to see CentralNic’s rapid progress on its journey to become a world-leading online marketing platform, helping online consumers make informed choices.

Our business strategy continues to deliver outstanding results.

We look forward to achieving exceptional results and performance in 2023 and beyond.” 

The Equity

In total there are some 288,660,084 shares in issue, of which 5,752,675 shares are held in Treasury, leaving pure Voting Rights on just 282,907,409 shares.

After Kestrel, the other large holders in the equity include Inter.Services (12.07%), Slater Investment (10.00%), Maitland Asset Management (4.98%), Chelverton Asset Management (4.97%), Erin Invest & Finance (4.86%), CentralNic Employee Benefit Trust (3.95%), JTC Private Banking (3.56%), Schroder Investment Management (3.34%), and Canaccord Genuity Wealth (2.87%).

Broker’s Views – Target Prices 180p To 350p

The last bit of research that I saw from analysts at joint broker Berenberg showed estimates out for the year to end December 2023 for $782m sales, $90m EBITDA and 18.73c earnings.

The year to end December 2024, they estimate, will see revenues rise to $854m, creating $99m EBITDA and 21.44c earnings per share.

The Berenberg Price Objective Is 250p A Share.

However, very much more bullish views come from analyst Bob Liao, at the group’s NOMAD and joint broker Zeus Capital, he has estimates out for $825.5m revenues in 2023, EBITDA of $91.8m and earnings of 20.8c per share.

For 2024 his figures suggest $868.9m revenues, EBITDA of $97.3m and earnings of 22.4c per share.

Looking further forward to the 2025 year, he goes for $921.2m revenues, EBITDA $104.5m and earnings of 24.3c per share.

At Edison Research, analysts Max Hayes and Katherine Thompson, are looking for $833.7m revenues this year, $94.4m EBITDA and 20.1c of earnings.

For 2024 they see $909.6m sales, $103.0m EBITDA and 22.5c of earnings.

Latest analyst forecasts are within a range of $771.8m and $833.7m for FY23 revenue and $90.9m and $97.8m for FY23 EBITDA

Of the three brokers analysts that follow the group the Highest Target Price was 350p, the Lowest Target Price was 180p, with the consensus average being 265p per share.

My View – Break To 130p And Then 150p+

This £327m capitalised business is ‘a real money machine’, it is highly cash generative.

CentralNic’s expense base is stable, which should allow continued revenue growth to expand margins.

It is worthy of a significantly higher market rating than it has currently.

The group had an outstanding start to the year, achieving its best-ever first quarter, so I look forward to a positive Interim statement within the next fortnight.

I remain a great fan of its annual recurring revenues and its massive global cash generation.

It has a proven business model and is totally scalable as it grows strongly.

Looking forward to the forthcoming statement I am hoping that it will bring about some upward regrading of estimates by brokers and the market generally.

As I have stated before – ‘Value will out’ and that will happen with CentralNic, these shares, which touched 121p after the big buy-back news earlier this week, are definitely for buying at around the current 115p.

At that level they are only trading on just 7.25 times price-to-earnings – which is exceptionally cheap for such a fund generator, and just half of the UK market average rating.

Once the shares have bounced back up through the 130p level, I see them returning to trade in the 150p – 160p range which was peaked last December.

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

(Asterisk * denotes that Target Price has been achieved since Profile publication)