CentralNic Group – magical ARR numbers should spin a bigger spell on investors
In just one month’s time, this group will be announcing its third quarter results to end September.
We already know that they will be very good, because earlier this week the company issued a Q3 Trading Update informing shareholders that its results for the period will be ahead of market expectations.
This London-based business was set up in 1996, floated in 2013, today operates worldwide.
Basically the Aim-listed CentralNic Group (LON:CNIC)supplies the tools for businesses to get online through offering domain names, hosting, websites, e-mail, website security, brand protection and domain monetisation services.
It operates through Indirect, Direct, and Monetisation segments.
The company's Indirect segment distributes domain names to retailers and resellers through a network of channel partners.
Its Direct segment provides ancillary services; monitoring services to protect brands online; and technical and consultancy services to corporate clients; and it
licenses its registry management platform and sells domain names to large corporations.
The company's Monetisation segment offers advertising placement and data traffic management services, as well as also selling domain names.
It also provides social marketing, search engine marketing advertising, and display advertising services.
Through recent acquisitions, it is now creating new revenue streams to help to provide significant upside potential. It is doing that by offering related services such as hosting, cybersecurity and brand protection.
CentralNic operates globally, with customers in almost every country in the world.
The group’s substantial client list includes some of the world’s largest companies, several national governments, and loads of global brands.
It also markets its services to large, medium and small-sized enterprises as well as Joe Public too.
It earns recurring revenues from the worldwide sales of internet domain names and other services on an annual subscription basis.
It really does enjoy magical numbers in its ARR (annual recurring revenues) – deriving around 99% of revenues from subscription products.
Its services are paid in advance. Its cash generation is enviable.
It helps to drive the growth of the global digital economy by developing and managing software platforms that allow businesses globally to buy subscriptions to domain names for websites and email, to monetise their websites, and acquire customers online.
Core corporate strategy
Its core growth strategy is identifying and acquiring cash-generative businesses in its industry with annuity revenue streams and exposure to growth markets and migrating them onto the CentralNic software and operating platforms.
It has been acting as somewhat of a global consolidator, through seeking out and making acquisitions in a highly fragmented market.
It operates within a staggering $30bn market, that for online presence services, which gives the group a massive space into which it can expand.
A very tight equity
The group has some 251m shares in issue.
Large holders include Kestrel Investment Partners (22.6%), Inter. Services (14.8%), Edmond de Rothschild Asset Management (France) (8.23%), JTC (7.71%), Canaccord Genuity Wealth Management (6.10%), Chelverton Asset Management (5.81%), Schroder Investment Management (5.43%), Herald Investment Management (3.81%) and BlackRock Investment Management (3.20%).
Erin Invest & Finance, which is a director’s holding holds 6.29%, while other directors have another 3%.
Q3 Trading Update
The group’s organic growth has further accelerated during the nine months to 30 September 2021, following its significant investment programme, resulting in the organic growth of 29% against the same period in the prior year.
The Q3 statement indicated that the company expects to report revenue of at least $280m and adjusted EBITDA of at least $32m for the nine months ending 30 September.
This represents an increase of at least 66% and 45% respectively over the $168.5m and $22.1m results reported for the same period last year.
Cash as at 30 September increased to $54m from $28.7m as at 31 December 2020. Net debt as at 30 September decreased to $79m from $85m as at 31 December, despite the deployment during the period of a total of some $13m on the acquisitions in the period.
The group’s CEO, Ben Crawford, stated that: "CentralNic's growth rally has further accelerated during the third quarter of the year with year-to-date organic growth now reaching a record 29%. The company expects to trade comfortably at or above the upper end of market expectations for the year for both revenue and adjusted EBITDA. We are particularly pleased that the accelerated growth is now also starting to translate into higher profits."
Analyst expectations of revenue and adjusted EBITDA for the 2021 financial year range from £348.6m to $355.3m and $41.1m to $42.0m respectively.
Bob Liao, an analyst at Zeus Capital, the group’s NOMAD and broker, bullishly states that “We see an increasingly strong profit growth profile for CentralNic. The Online Marketing division continues to take market share, the Direct and Indirect divisions are accelerating growth through investment and (in the) longer term, we expect to see operating leverage as the company elevated investment levels plateau. We believe this outlook is not reflected in CentralNic’s earnings multiples.”
As I stated in my mid-July profile “I believe that the shares of this ‘virtual money machine’ have certain medium-term investment attractions. They have a good upside potential on a steady incline. Give them two to three years and we could easily see 125p/150p.”
They were then just 89p, with which I set a price objective of 110p.
Well, that has been well beaten, with the shares now at 126p, up over 41% in three months. That was much faster than I expected.
Where do I see them going now?
Well, I reckon that another show of better-than-expected figures will strongly indicate that the ‘money machine’ is really accelerating its growth.
With such potential the shares could easily break above 150p and still offer big upside.
We shall just have to see what occurs on Monday 22 November when the Q3 results are published.
(Profile 12.07.21 @ 89p set a Target Price of 110p*)