• Mark Watson-Mitchell

CentralNic Group – never going to set the world alight but this really is a 'virtual money machine'

12th July 2021


Can you imagine how I reacted when I discovered this company has an annual recurring revenue (ARR) of around 99% from its subscription products.


To me that is like hitting a vein of gold, finding the Holy Grail, winning the Euro Millions – well perhaps a little over the top.


But you get my message.


This group is one of the world’s leading providers of internet infrastructure services.


Internet unlimited expansion


By now we all know that the internet is a vast ecosystem of small businesses, individuals, large corporations, ‘not-for-profits’ and Governments.


Together, those entities have made information more accessible, services more available, and global commerce more achievable than it was ever possible to imagine 25 years ago.


This has been an extraordinary technical and cultural flourishing and yet it is still in the early stages of its establishment.


We only have to look at the way the Covid-19 virus last year scuppered the sales on the High Street, however it allowed the online operators to achieve mega-returns as punters ordered from home.


What does it do?


The mission of the CentralNic Group (LON:CNIC) is “to enable the global economy to realise its full potential by providing the world’s most popular platforms and by connecting customers with the tools to achieve their online aspirations.”


The London-based group aims to run the world’s best internet domain registry platform, something that it has been doing for the last twenty-five years or so since it was set up in 1996.


With offices across the world, it already is a global leader in its marketplace. It supports over 50% of the top twenty generic top-level domains (gTLD’s) like .com, .org, .net, .gov .co, .us, and .mil etc. Four of them actually have more than 1m domains under management.


And CentralNic handles the back-end registry for so many of those leading gTLDs.


Three main divisions


The group operates through three main segments – Monetisation, Indirect, and Direct.


The company's Monetisation segment (46.5% of sales) offers advertising placement and data traffic management services, as well as selling domain names. It also provides social marketing, search engine marketing advertising, and display advertising services.


The Indirect segment (35.5%) distributes domain names to retailers and resellers through a network of channel partners.


Its Direct segment (18% of sales) provides ancillary services; monitoring services to protect brands online; and technical and consultancy services to corporate clients, as well as licensing its registry management platform and selling

domain names to large corporations.


The world is not enough


The group’s in-house domain names search system, which powers the domain extensions, is a global network of nameservers geographically distributed around the world. It guarantees the stability, security and resilience of the supported domain names.


On a sales-by-region basis Europe accounts for 68.1% of revenues, North America 17.5%, the Rest of the World 12.8% and the UK just 1.6%.


Operating globally with customers in almost every country in the world, it earns recurring revenues from the worldwide sales of internet domain names and other services on an annual subscription basis. My beloved ARR!


The group develops and manages its own proprietary software platforms for the global distribution of domain names, to all five of the major customer groups: small businesses, corporate customers, resellers, domain name investors, and domain name registries (both government-operated and privately owned).


Those groups also buy domain-related software and services, hosting, domain name and website monetisation, cybersecurity, online marketing and brand protection tools and even more of the group’s various products and services.


The company boasts of having some of the world’s leading businesses, governmental operations and brand names among its clientele.


Acquisitive strategy


The group, which floated way back in 2103, has kept up with the times, especially in technology. Along the way it has also been acquiring businesses across the globe as it seeks to achieve its strategic target of significant domination in a $40bn addressable market.


Its core growth strategy is identifying and acquiring cash-generative businesses in its industry, especially those which have annuity revenue streams and exposure to growth markets. It then looks to migrate them over onto the group’s software and operating platforms.


As it tucks in so much advance-payment subscriptions business it obviously has a strong cash conversion, although previous acquisitions have seen it take itself into net debt.


That is one of the very strong reasons why I love to see companies with very high ARR – it allows the financial directors a certain grounding in their analysis of anticipated revenues while underwriting corporate expansion moves.


The group has a significant ability to expand by both acquisition and organically over the next few years.


Market expectations


Net debt, which was some $85m by end-December 2020, is expected to reduce this year to $79m and then fall again this year to $66m in 2022, and $56m by end 2023.


Revenues increased from $110m in 2019, to $241m in 2020. They are expected to go up to $310m this year, with an estimated $325m next year.


For 2023 estimates suggest $340m of sales.


Pre-tax profits have gone from $16m in 2019, to $20m in 2020, around $27m hoped for this year and $31m next year, worth 11c a share in earnings.


The group’s interim results are expected to be announced next month.


A strong equity


The group has some 251m shares in issue.


Large holders included Kestrel Investment Partners (22.5%), Inter Services (14.8%), JTC (8.90%), Butterfield Bank (Guernsey) (7.14%), 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 8.22%, while other directors have another 3%.


Share price performance


Zeus Capital raised £7m @ 55p a share when the company floated in September 2013. Its shares rose to 108.5p within a couple of months, before falling back to just 25p in March 2015.


It has taken another five years to see them rise back up again, touching 106p in January this year.


Since that time, they have drifted down to 80p, ahead of recently nudging back up to the current 89p level.


My View


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.


In the meantime, ahead of the interims,


I will now set an early Target Price of 110p.


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