I consider that the market is missing a trick here.
The shares of CentralNic Group (LON:CNIC) are significantly undervalued.
They could well rise 50% and still look cheap.
My frustration
When I look around the market, I see masses of companies whose shares are trading at substantial price-to-earnings ratios, some several times over the overall market average ratings.
I see companies that have consistently underwhelmed but whose equities still maintain extremely high valuations based upon ‘pie in the sky’ high hopes.
What I look for
My criteria for Profile selection of companies up to £500m in market capitalisation,
include growth in sales revenues, profitability, earnings, dividends, balance sheet strength, management ambition, market share and potential for continuation of the same.
Where a company has gone into losses, I take a view on how the management is coping, the reasons for the losses (like early-stage development of a product or services into a chosen market), and then whether the company has a market presence sufficient enough to seek and obtain further funding to carry it on through.
Obviously, companies have hiccups along the way, like pandemics, wars, product supply and shortages and similar. That is when you can judge its management backbone and ability.
The magic mantra
There are many companies that I look at that have over-ambitious finance directors who give market analysts too rosy a picture and then fail to deliver, using some excuse or another for non-performance.
One company boss I know has a distinct mantra – ‘under promise and over deliver’ – which is why the market has faith in what his management teams have to say about the various companies in which he has been involved.
It also explains why he has been able to secure some very appealing acquisitions for his companies, because both the banks and the market approve of his methods and support his efforts.
I loathe rubbish
Anyway, enough of my investment criteria, readers may well have their own methods that prove more successful.
I have stated the above points only because I get exasperated when I see ‘total rubbish’ getting premium ratings, when ‘proper’ companies can so often trade well below market averages.
Criteria bullseye
One such example of a company hitting my criteria is CentralNic Group – I consider that its shares should now be trading at around a level of 185p, which is 50% higher than today’s price of 125p.
And that is at a minimum to what I would consider to be a more proper rating for its shares.
So, what does the company do?
Lifting directly from the group’s own information material –
“CentralNic is a London-based company which drives the growth of the global digital economy by developing and managing software platforms allowing businesses globally to buy subscriptions to domain names, used for their own websites and email, as well as for protecting their brands online.
These platforms can also be used for distributing domain name related software and services, an opportunity that contributes significantly to the group’s organic growth.
The groups inorganic 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 company’s software and operating platforms.
CentralNic operates 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.”
The group provides domain name services worldwide.
It operates through Online Presence and Online Marketing segments.
The company's Online Presence segment provides tools for businesses to go online, such as reseller, registry operator, registry service provider, retail, and computer software channels, as well as strategic consultancy and related services.
The company's Online Marketing segment offers advertising placement services for domain name owners, content website operators, and e-commerce website operators.
It also provides social marketing, search engine marketing advertising, and display advertising services, as well as selling domain names to registrants.
It ticks my boxes
As far as I am concerned this company ticks all of my boxes.
It obviously ticks the boxes of a number of professional and institutional holders.
Its owners list includes Kestrel Partners (21.8%), Inter.services Gmbh (12.9%), Slater Investments (9.11%), JTC Private Banking (6.03%), Canaccord Genuity Wealth (5.89%), Erin Invest & Finance (5.48%), Edmond de Rothschild Asset Management (France) (5.48%), Chelverton Asset Management (5.20%), and Schroder Investment Management (3.95%) amongst many others.
With its 288.67m issued shares trading at 125p, the group is capitalised at £362m.
Latest Trading Update
On Monday of this week the company announced a Q1 Trading Update for the three months to end March.
Revenues were up 86% to $156.6m ($84.4m), its adjusted EBITDA was 83% better at $18.5m ($10.1m), its operating profit was $10.0m ($1.4m), while its net debt was down 18% to $61.3m.
The figures reflect the potential of its strong marketplace for Online Presence and Online Marketing services.
CEO Ben Crawford stated that:
"CentralNic has enjoyed a strong start to the year with year-on-year organic growth now reaching north of 50%, gaining market share in a growing market.
At the same time, we have continued to add scale and capability through the completion of three strategic acquisitions in the period, including VGL, our largest acquisition to date, funded by an oversubscribed equity placing and tap bond issue.
With notably reduced leverage and a healthy cash cushion, CentralNic remains well positioned for the future.”
Broker’s Views
The group’s NOMAD and broker Zeus Capital stated that the Update showed that the group was ‘positioned to outperform’ with its analyst Bob Liao forecasting strong growth ahead.
His estimates for the current year suggest revenues of $573.4m ($410.5m), with its EBITDA rising from $46.3m to $67.0m for the year to end December 2022. That should see earnings coming out at 16.5c (11.8c) per share.
Conservatively, and without any acquisitions, he goes for revenues to rise to $607.3m next year and $643.4m in 2024, with EBITDA of $72.3m and $76.1m respectively, lifting earnings up to 17.7c then 19.1c in 2024.
My View
Straight after the Q1 Update on Monday the shares hit 141p in reaction to the positive news.
The highest that they have been in the last year was 153.75p last November.
That was well before the well oversubscribed £45m fundraising in early March for the $75m acquisition of VGL, the German online marketing group.
With the bulk of its revenues earned globally and enjoying significant annually recurring revenues, this group is a ‘real money machine’ that is not to be ignored.
I consider that its shares are trading at two-thirds of what would be an average value, when in fact they rate a premium valuation far higher.
That will happen in due course, I am sure.
And that is why CentralNic Group is currently my top-ranking Profile selection.
I see them easily hitting 185p in due course.
These shares are a steal at around the current 125p.
(Profile 12.07.21 @ 89p set a Target Price of 110p*)
(Asterisks * denote that Target Prices have been achieved since Profile publication)