CentralNic Group Plc (LON:CNIC) has delivered a solid set of FY18 results this morning that are 3.8% ahead of our forecasts and up 66% YoY at the adj. EBITDA level (excluding the one off domain name sales business discontinued in 2017). This has been a transformative year for the group following a number of acquisitions including KeyDrive which effectively doubled the size of the group and significantly improved earnings quality. Recurring revenues are now at 90% and cash conversion in 2018A approaching 100%, highlighting this quality. We leave trading assumptions unchanged for 2019E and 2020E but update our working capital assumptions to reflect the cash outperformance and negative working capital cycle in the business. We now expect net debt at the end of 2019E of £2.9m growing to £3.0m in 2020E. At the current share price, the group trades on a 2019E EV/EBITDA of 5.9x and a P/E of 11.7x with a FCF yield of 7.6% based on 2019E forecasts.
2018A results: Revenue was up 100% YoY to £43.7m (2017: £21.4m, excluding one-off premium domain name sales – a business discontinued in 2017) with gross profit up 69% to £19.7m as a strong performance in the core reseller and small business segments (up 98% and 25% respectively) offset a 35% decline in the corporate segment as the group moved away from one off sales of premium domains. Adjusted EBITDA grew 66% to £7.0m (2017: £4.2m) and cash conversion approaching 100%. Net debt came in in line with our forecasts (updated in February) as a result at £2.5m (ZC forecast £2.4m) reflecting the strong cash conversion.
Operational highlights: The group made significant progress in executing the acquisition strategy during the year, making the transformational acquisition of KeyDrive, which essentially doubled the size of the group and the number of customers and added staff in Germany, USA and Luxembourg. The KeyDrive acquisition has significantly improved the underlying earnings quality of the business with recurring revenue at 90% for the enlarged group, while also creating cross selling opportunities and potential cost synergies.
Forecasts: We leave our trading assumptions unchanged for now, expecting adjusted EBITDA of £12.8m in 2019E growing to £13.5m in 2020E. We update our working capital assumptions. We now expect net debt in 2019E of £2.9m growing to £3.0m of net cash in 2020E. We also introduce our 202E forecast for the first time, assuming further growth in the core reseller and small business segments offset by decline in the corporate segment, implying an adj. EBITDA in 2021E of 13.9m.
Valuation: At the current share price, the group trades on a 2019E EV/EBITDA of 5.9x and a P/E of 11.7x. We believe this valuation is compelling given the track record of the business, the quality of the earnings and the cash generation, with a FCF yield of 7.6%.
