Centralnic Group Plc (LON:CNIC), the internet platform business that derives revenue from the worldwide sales of internet domain names, today announced its half year results for the six months ended 30 June 2016. During the first six months of FY16, CentralNic Group Plc has demonstrated how the acquisition of Instra has driven the company’s growth strategy by both increasing recurring revenues (now 60% of sales versus 51% in H115) and improving the quality of earnings. In terms of headline numbers, sales have increased by 101% to £8.9m (£4.4m), adj. EBITDA by 29% to £1.3m (£1.0m) and adj. PBT by 12% to £0.9m (£0.8m). The Retail division was significantly enhanced by the contribution from Instra, while there were minimal premium domain name sales in H116 compared to £0.7m H115, which diluted the overall gross margin to 26% from 43%. Management are in advanced discussions with trade buyers for premium domains and anticipate securing significant high value and high margin sales in H2, and as a result, remain confident of achieving FY numbers.
- Transformative acquisition of Instra has improved quality of earnings of the Retail division. Sales from Retail increased to £6.8m from £1.8m last year, thanks to a £4.9m contribution from Instra, with integration progressing in line with management expectations. The division delivered £1.1m in adj. EBITDA, with £1.0m from Instra, versus a small loss in the prior period. In addition to creating exposure to emerging markets growth, the Instra business has similar economics to CentralNic in terms of strong cash generation and utility style earnings, with clients paying upfront for 1-10 year usage of a domain name and an annual renewal fee for continued usage. The division also saw underlying organic growth of 13%, primarily from Internet BS, which provides portfolio tools for domain name investors.
- Firmly established as the number one Wholesaler of new TLDs globally with 34% market share or c.8.2m domain names. Wholesale division generated revenue of £1.6m (H115 £1.6m) and EBITDA contribution of £0.7m (£0.6m). xyz continues to rank in the number one spot, with c.6.5m of domain sales, boosted by a large-scale 2 year anniversary marketing campaign in June, which resulted in 1.9m domains registered within a single day and over 3.6m new registrations in the month. Whilst the benefit has not translated into material earnings yet, due to heavy discounts, there are now significant volumes of domain names that will be up for renewal within the next 12 months. Although the scale of renewals is unknown (we conservatively assume c.10% renewal rates), of the 6.5m .xyz domains, for every 1% that renew, CentralNic receives over £0.1m in EBITDA based on current renewal prices. Additional domain extensions won in the period include .store, .fm, .am and .art.
- Significant opportunities for growth in Enterprise division. Enterprise division generated revenue of £0.5m (H115 £1.1m) and EBITDA loss of £0.1m (£0.8m). This reflects a change in the mix, notably the exclusion of any significant premium domain names that occurred in the prior period, however we expect premium sales to occur in H2. Increasing recurring revenues is a key strategy of the division, and discussions are progressing well with a leading software and managed service provider to the telco industry to introduce software to allow sales of domain names. The division is considering the introduction of new services in the areas of online security potentially via acquisition.
- Valuation. CentralNic is trading on an EV/EBITDA of 6.2x to Dec 16 falling to just 3.8x to Dec 17, and P/E of 13.1x to Dec 16 falling to 9.7x, a significant discount to its peers. Given the growth prospects of the business, coupled with the strong operating cash flow characteristics, the impressive track record being built by management via successful acquisitions and the diversification of the business, we feel the shares offer investors a value opportunity given the industry backdrop, where Centralnic Group Plc listed peers are typically capitalised in the billions of dollars.
