Centralnic Group PLC (LON:CNIC) is the topic of conversation when Zeus Capital Research Analyst John Wilson caught up with DirectorsTalk for an exclusive interview
Q1: Centralnic released their interims on the 7th September which showed good growth across the business, before we do a recap of the financials, can you provide us with a quick summary of what the business does?
A1: Centralnic Group is a business that develops and manages software platforms and essentially allows businesses to use the internet for their websites and emails. It operates globally and it earns revenues from the worldwide sales of internet domain names and hosting and this is done on an annual subscription basis.
Operationally, the business is split into three divisions, the first is retail, now this is primarily the Instra business which offers domain portfolio registration to corporates that allows them to build websites and protect their brands online, across the globe. It also retails domain names and website hosting to small businesses and individuals. Part of the retail, there’s also a business called Internet.bs and this provides a sophisticated domain portfolio management tool for domain name investors and website professionals.
The second division is wholesale which is the core Centralnic business, historically, and this essentially provides the back-end services to top-level domain (TLD) names which allows them to operate. This is things such as managing the registry and they’re responsible for making sure that the TLD is 100% operational and online.
The third division in enterprise. At the moment, this is primarily based on domain name trading but soon to be corporate registrar and online brand protection services and this is going to be under the new Commercial Director who did this at Group NBT.
Meanwhile, the business is pursuing a core growth strategy and they’re looking to build up quality recurring revenues by rolling up similar businesses with annuity revenue streams, exposure to high growth, high margin markets and then migrating them onto Centralnic’s platforms to really benefit from their technology and expertise.
Q2: So, how do the financial results for the half year to June look?
A2: The business delivered good underlying organic growth in the first half. In terms of headline numbers, sales increased by 18.5% to £10.6 million, gross profit increased by 29.5% to £3 million with margin increasing from 25.5 to 27.9%. Because Centralnic generates its revenue globally, there was an impact from the Brexit which happened at the end of June last year so currency headwinds were in play and there was an FX loss of £300,000 versus the £400,000 gain the year before. So, excluding this, adjusted EBITDA was up 50% to £1.4 million and adjusted PBT was up around 79% to £1 million so good underlying growth in the first half but the business is very much second-half weighted and they’re on track to meet the full year.
Q3: The business recently completed a major acquisition in Slovakia, could you provide us with a summary of the deal that went down there?
A3: Yes, absolutely. This is post-period end, in August, they announced the acquisition of SK-NIC, SK-NIC is the manager of the exclusive country code, top-level domain for Slovakia, .sk, it was for a consideration of €21.3 million with deferred consideration of up to €4.9 million dependant on hitting defined three-year growth targets.
In terms of financials, for SK-NIC in the first half of 2017, establishing new costs and revenues bases under Centralnic’s ownership, it achieved revenue of €1.9 million, EBITDA of €1 million and PBT of €1.1 million, all of which are expected to grow under Centralnic’s ownership.
The deal is immediately earnings-enhancing for Centralnic, we forecasted at the time a 15% accretion to our PBT forecast in the first full year of ownership. The deal is funded by an £18 million term loan and £3 million overdraft and the deferred consideration will be paid from the profits from the enlarged group.
So, just a bit of background, it’s a quality, high-margin business with 80% gross margins, it’s got a long-term track record having managed SK since 1993. There’s an integration strategy in place and Centralnic see significant opportunities to leverage their expertise and superior technology to grow the business. In terms of recurring revenue, it’s got a high domain name renewal rate of over 77% so really this provides consistent attractive recurring revenues from a diverse customer base for Centralnic.
Q3: What is the outlook like for Centralnic Group for the year to December and the current valuation?
A3: Looking ahead, as I mentioned before, there’s a significant second-half weighting and the management are very confident of meeting the full year numbers. So, in the year to December ’17, their current valuation puts them on an EBITDA of 10.8 times, dropping to 8.4 in the year to December ’18 and PE of 13 times. Given the strong operating cash flow characteristics of this business, the track record that they’re building via acquisitions, continuing diversification of the business and de-risking, increasing recurring revenues, we feel the shares offer real value opportunity at the minute given the industry backdrop, with their peers are typically capitalising at billions of dollars.
