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  • Writer's pictureMark Watson-Mitchell

CentralNic Group – don’t underestimate this group’s potential, I have set a new Target Price of 200p

On Monday of next week CentralNic Group (LON:CNIC) will be announcing its Q4 Trading Update, a statement that I am really looking forward to reading and assessing.

CentralNic Group is the global internet software company that derives recurring revenue from marketplaces for Online Presence (one-third of group sales) and Online Marketing services (two-thirds of revenues).

Next week’s announcement will be the first to be made by the new CEO Michael Riedl, the former CFO, who not only knows the group very well but also just where he wants to take it as he goes forward in his last December-appointed role.

Ben Crawford, the former CEO, built up the group by strategic acquisitions, taking its revenues up from $2m to $700m inside 13 years.

I believe that Riedl will use the group’s current strength to build up more organically. That does not mean that the M&A stops, but instead as the group has grown so much, the impactful deals will need to be so much bigger.

In fact, since its IPO in 2013 the group’s revenues have risen 200-fold, that is impressive.

The Business

Today the London-based AIM-listed company which drives the growth of the global digital economy by developing and managing online marketplaces allowing businesses globally to buy subscriptions to domain names for websites and email, to monetise their websites, and to acquire customers online.

Its core growth strategy has been in identifying and acquiring cash-generative businesses in its industry with annuity revenue streams and exposure to growth markets and then migrating them onto the CentralNic software and operating platforms.

CentralNic provides tools to entrepreneurs, enterprises and Governments in virtually every country in the world enabling them to build, secure and monetise their own part of the internet.

On a sales per region basis Europe accounts for 70.1% of sales, North America 15.2%, the UK 1.7%, while the Rest of the World takes in the balance.

The market for its services is enormous, worth some $60bn for Online Presence, for domain names and e-mail, and $600bn for Online Marketing, for customer acquisition and traffic.

Big Share Buyback Programme

As I have described many times before, the business is ‘a real money machine’, it is highly cash generative.

The group has declared that

“Looking forward we will review our approach to cashflow deployment within the business and expect a greater focus on returns to shareholders versus M&A.”

That has previously allowed the company to successfully execute its M&A agenda, while at the same time improving its net debt position.

On 30 December last year, the group, having achieved those two objectives, launched a maiden share buyback, with the aim to spend up to £4m doing so.

The group waded into the market and acquired around £500,000 worth of its stock each trading day this year, finishing up last Thursday with a purchase of a final 87,468 shares @ 150.44p each.

In total it bought-in 2,570,160 of its shares, paying around 155.63p each in doing so.

That, no doubt, is why the group’s shares fell back 12p, enabling the shrewd ‘bears’ to buy back in to cover their ‘shorts’, with a massive 3.6m shares traded on Friday, closing at 144p each. That is over 5 times the average daily dealing volume.

As a matter of interest as the group was engaged upon its buyback, its non-executive director Max Royde was also in the market for more stock.

Royde is currently managing partner at Kestrel Partners, an investment management company specialising in business-critical software companies. He co-founded Kestrel Partners in 2009 and is a fund manager of Kestrel Opportunities. Prior to Kestrel he was a managing director of KBC Peel Hunt, running its technology franchise. He has over 20 years’ experience focusing on the technology sector.

As of last Friday, Kestrel Partners held 65,802,518 shares in CentralNic, representing a 23.01% stake and the biggest holding in the group’s equity.

The Equity

In total there are some 286,089,924 CentralNic Group shares in issue.

After Kestrel, the other large holders in the equity include Inter.Services (12.8%), Slater Investment (9.11%), JTC Private Banking (6.03%), Erin Invest & Finance (5.46%), Maitland Asset Management (5.06%), Canaccord Genuity Wealth (4.99%), Chelverton Asset Management (4.98%), Schroder Investment Management (3.95%), and then the CentralNic Employee Benefit Trust (3.90%).

Broker’s Views

Analysts at joint broker Berenberg have estimates out for the year to end December 2022 to have shown sales of $701m ($411m), with adjusted EBITDA having almost doubled to $80m ($46m), leaving earnings at 17.47c a share.

For the current year they have $782m sales, $90m EBITDA and 18.73c earnings.

The year to end December 2024, they estimate, will see revenues rise to $854m, creating $99m EBITDA and 21.44c earnings per share.

The Berenberg price objective is 250p a share.

Analyst Bob Liao at Zeus Capital, the group’s NOMAD and joint broker, has views out for $709.6m revenues in 2022, EBITDA of $82.0m and earnings of 20.9c per share.

The current year sees him going for $752.2m sales, $88.6m EBITDA and 22.0c earnings.

For 2024 his figures suggest $797.6m revenues, EBITDA of $93.9m and earnings of 23.6c per share.

My View – setting a new Target Price of 200p

This group is worthy of a significantly higher market rating than it has currently.

I am a great fan of its annual recurring revenues and its massive global cash generation.

It has a proven business model and is totally scalable as it grows strongly.

Continually researching the mass of UK-quoted smaller companies, as I do, I witness a vast array of overvalued, overhyped rubbish rated on ridiculous ratios.

So, when I identify companies, such as CentralNic Group, I find it difficult to understand why others trade on such gross premiums to value.

The shares, ahead of next Monday’s Q4 Trading Update, are currently only 144p – which in my view is totally out of kilter with the market.

I would hope that next week’s statement will bring about some upward regrading of estimates by brokers and the market generally.

Is it possible that another ‘share buyback’ programme could be announced shortly?

I have absolutely no doubt that this group’s shares are heading higher, with my new Target Price now being fixed at 200p, which could be easily achieved within the next few months.

‘Value will out’ and that will happen with CentralNic. These shares are definitely for buying at around the current levels.

(Profile 12.07.21 @ 89p set a Target Price of 110p*)

(Asterisks * denote that Target Prices have been achieved since Profile publication.)


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