CentralNic Group Plc (LON:CNIC) announced on 25th August that it was to acquire SK-NIC, the manager of the exclusive country code top-level domain for Slovakia. Since then, the structure of the acquisition has changed with the previous asset purchase agreement lapsing and a new share purchase agreement being entered into on 30th November 2017 following which CentralNic will acquire SK-NIC as a legal entity and its associated assets and liabilities.
The deal is essentially unchanged, with the maximum total consideration remaining at €26.1m, with the initial cash consideration slightly lower at €20.3m (€21.3m) and the deferred cash consideration slightly higher at €5.9m (€4.9m), and extended to cover a period to 2023. The deferred cash consideration remains dependent on hitting defined three year growth targets. As a result of the delays in the deal completing, our FY17 numbers reduce by c.6% at the EBITDA level, to be in line with the core business expectations, from £6.9m to £6.5m (reflecting the delay of impact in SK-NIC), however our FY18 forecasts (including SK-NIC) remain unchanged.
- In unaudited accounts for the first half of 2017, with SK NIC establishing new cost and revenue baselines, it achieved revenue of €1.9m, EBITDA of €1.0m and PBT of €1.1m, all of which are expected to grow under CentralNic ownership. The deal will be immediately earnings enhancing (we still forecast at least 15% accretion to our PBT forecast in the first full year of ownership) and is being funded by an £18m term loan and £3m overdraft, with deferred consideration paid from the profits of the enlarged group.
- Acquisition delivers the core objectives of CentralNic’s global growth strategy. The deal once competed is immediately earnings enhancing despite significant planned investment in the business. It significantly increases revenue visibility, boosts recurring revenue streams due to high renewal rates of over 77%, as well as establishes a dominant position in a new international growth market. SK-NIC is a quality, high margin business (c.80% gross margin), with a long term track record, having managed .sk since 1993. There is also an integration strategy in place with significant opportunities to leverage CentralNic’s expertise and superior technology.
- Trading update. The company expects to trade in line with market expectations for the full year to 31 December 2017, after adjusting for a lower than anticipated contribution from SK-NIC as a result of the delayed completion of the acquisition.
- Zeus Valuation. CentralNic is trading on an EV/EBITDA of 7.9x to Dec 18 and P/E of 12.3x. 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.