Having a website is essential to any successful business and having a website requires acquiring a domain name. It’s here that CentralNic (CNIC) intervenes. In the age of e-commerce, it’s the digital equivalent of a real estate company, but instead of acquiring buildings and leasing them to traditional retailers, it’s acquiring domains.
- Rapid growth
- Almost all income is recurring
- Strong cash generation
- Growing market
- Short history of organic growth
- Integration risks of acquisitions
Domains are a key part of the Internet’s infrastructure and the market is currently estimated to grow at around 3% per year. Currently, over 45 million domain names use at least one of CentralNic’s platforms. This represents about 12 percent of the market.
Subscription sales accounted for 45% of activity in the first six months of 2021. The remaining 55% of revenue came from marketing, an activity that contributed almost nil in 2019. The operation Marketers use the visibility of all traffic going to their domain names and then use AI software to match ad buyers and sellers. As the company already has relationships with many companies, marketing services can easily be sold to existing clients.
Once customers subscribe to CentralNic, they are unlikely to leave as it is difficult to switch providers in the domains industry. There are two advantages to being a persistent subscription business. Almost 99 percent of its revenue is recurring, so it’s unlikely that its revenue will drop dramatically in any given year. The company also doesn’t have to spend a lot of money marketing its current customers in order to convince them to stay loyal. The gap this creates makes it problematic for new competitors to enter the market.
The flip side of this story is that because the clients are so clingy, it is difficult for CentralNic to take them away from its competition. To develop its clientele, it must be acquired. In January 2021, it acquired French company registrar SafeBrands for $ 4.4 million, 0.9 times its turnover at the time. It was a low price for a deal that gave the company a new portfolio of French websites.
In September, he announced the acquisition of a revenue-generating website publishing network from White and Case for $ 6.5 million. This purchase is expected to generate $ 1.5 million in annualized cash profit. Buying at only four times your future profits is a very affordable business.
The reason these acquisitions seem relatively cheap is that CentralNic immediately has the ability to sell its advertising services to acquired clients. The companies from which it acquires do not have the means to do so.
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The $ 48 million acquisition of online advertising company Team Internet in late 2019 kick-started marketing activity. This has given CentalNic the proprietary technology that enables domain name matching with the highest paying advertisers. Since then, he’s bought Codewise for $ 36 million in 2020 and Wando for $ 6.5 million in February this year.
In 2020, around $ 400 billion was spent by online marketers to acquire new traffic to their websites and demand is growing by more than 20% per year.
But as online advertising is a growing industry, many big players are in the throes of changes to protect user privacy. Earlier this year, Google announced that third-party cookies will no longer be used on its Chrome browser, meaning ad companies will no longer be able to collect data on user habits. Apple has also started asking its users in the App Store if they want to receive targeted advertising. The majority chose not to, which caused huge amounts of value to drop. Snapchat (United States: SNAP) and Facebook (US: FB), both of which have seen their ad revenues drop significantly.
CentalNic’s marketing technology, however, is not based on cookies or the collection of research data from individuals. It uses “principles of contextual marketing, not requiring the collection of personal data for retargeting purposes”. Covid-19 has accelerated demand for digital advertising and CentralNic can deliver it without facing the risks associated with tighter privacy rules.
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Sales have grown more than eightfold, from £ 24.3million (or $ 31.4million for consistency with CentralNic’s move to dollar reporting) to $ 241million over the three years through 2020. Adjusted Cash Profits (Ebitda) increased almost six times over the same period, from £ 4.3 million ($ 5.4 million) to $ 30.6 million. However, most of this growth has been driven by acquisitions. Organic revenue growth tends to be more valued. So it was great news that in its latest business update, CentralNic showed strong evidence of organic expansion. For the nine months ended September 30, 2021, organic growth was 29%.
Broker Stifel said the company has now “freed itself from the growth rate associated with the field.” Its US peers saw slower growth in their latest quarterly earnings, with GoDaddy’s sales increasing 13.8%, while Verisign and United Internet grew 5% and 4.7% respectively.
The forecast is revenue of $ 280 million and cash profit of $ 32 million for the nine months through September. This is a 66% increase. 100 and 45 p. 100, respectively. The cash generation is also very impressive as CentralNic is a business with no assets. In the first half of the year, the adjusted conversion of operating cash was 126 percent. The cash balance is now $ 54 million from $ 28.7 million in December and net debt is down to $ 79 million from $ 85 million, despite spending $ 13 million on acquisitions of Safebrands and Wando.
Analysts expect cash revenue and earnings of up to $ 355 million and $ 42 million, respectively, for the full year. Free cash flow is expected to be $ 29.5 million, giving it a handsome 6.3% free cash flow return based on its enterprise value. CentralNic is now in an unusual position to generate significant organic growth and still generate enough cash to internally fund its acquisition strategy while trading at a relatively low valuation. It seems to be both a game of growth and value.
Always good value for moneyative to peers
Since the beginning of October, investors seem to have started to understand that something special could be on offer. Its stock price has risen about 30 percent since posting those impressive organic growth figures last month.
There are currently no UK listed competitors, but compared to its US listed peers GoDaddy and Verisign, it still looks very affordable even after the steep rise. GoDaddy and Verisign have PE 2023 ratios of 28 and 30, respectively. Compare that with CentralNic’s actions on just 15 times the 2023 forecast.
UK markets appear to be realizing the potential of domain name companies but, based on its US peer reviews, there is still some way to go. And in a strongly consolidating market, CentralNic, with its relatively low rating, could go from hunter to hunted. It is possible that GoDaddy decides to acquire it. Last year, GoDaddy had free cash flow of $ 698 million and has a strong track record. A deciding factor could be the opinion of Kestrel Partners, an almost 25 percent shareholder. The boutique investment firm liquidated many of its other significant positions when the companies in which it held stakes were acquired. Either way, there is a lot of potential for shareholders.
|Company details||name||Mkt cap||Price||52 weeks Hi / Lo|
|CentralNic (CNIC)||£ 354 million||141p||141p / 72.6p|
|Size / Debt||NAV per share *||Net cash position / Debt (-) *||Net debt / Ebitda||Operating cash flow / Ebitda|
|34p||– £ 65.4 million||4.1 x||43%|
|Evaluation||Before PE (+ 12 months)||Before DY (+ 12 months)||FCF Yld (+ 12months)||VE / Sales|
|Quality / Growth||EBIT margin||ROCE||5-year sales CAGR||TCAC EPS 5 years|
|Forecast / Momentum||Fwd EPS grth NTM||Before EPS grth STM||3 month old mom||% change in EPS before 3 months|
|End of year 31 Dec.||Sales ($ millions)||Profit before taxes ($ m)||EPS (c)||DPS (p)|
|source: FactSet, adjusted PTP and EPS figures converted to £|
|NTM = next twelve months|
|STM = Second Twelve Months (i.e. in one year)|
|* Converted to £, includes intangible assets of £ 251million or 75p per share|
|** Converted to $, switch to $ report from 2019|