Q1: CentralNic Group have announced the acquisition of Codewise, funded by a £30 million capital raise. Bob, can you just give us an overview of the business?
A1: Codewise consists of two related businesses, the first is a marketplace for domain name investors and the second is an online marketing platform. The company has grown very strongly over the last few periods and the cash conversion has been very strong as well.
So, over the past 18 months, the company has grown revenues 21%, gross profits 13% and adjusted EBITDA 37% on an annualised basis and the company has been able to convert that EBITDA almost 100% to cash over that period.
So, the business is a very well rounded business.
Q2: Codewise seem highly complementary to CNIC and its monetisation division, can you highlight some of the rationale for the transaction?
A2: The Codewise transaction builds on successful acquisition of Team Internet which was done last year and was the first move into this monetisation market that’s a very attractive high growth market.
The Codewise acquisition adds steel to this monetisation business and it also eliminates a key competitor so we’re estimating that the acquisition could raise the company’s share of the monetisation market to about 37% from 26%. It could push monetisation revenue within the company from 44% to about 57% so it’s becoming a more important part of the business and a high growth market for CNIC.
The acquisition also diversifies the company’s customer base and its products, Team Internet partnered almost exclusively with Google whereas Codewise partners directly with many many small advertisers. So, Codewise is adding about 6,000 new clients across 190 countries so that’s going to help with diversification on a customer basis. The acquisition also diversifies the CNIC’s product offering, the Team Internet product provides click-through advertising whereas Codewise, you’re looking at alternative forms of advertising such as something called redirection and push advertising .
So, I think diversification as well as better competitive advantages within the monetisation market are key investment rationales.
Q3: Finally, can you just take us through some of the financial benefits of the acquisition and your views on the Centralnic Group valuation?
A3: The company is paying about 4.9 times last 12 months EBITDA which we believe is very attractive given the company’s good growth, which we just talked about, and it’s high cash conversion but also, benchmarked against some peers.
So, if you look at what the company paid for Team Internet in a distressed situation, that was 4.5 times last 12 months EBITDA so not too far off how much they’re paying for Codewise. If you then look at listed peers, they’re currently trading at multiples of between 23 times and 12 times last 12 months EBITDA so it’s looking very very attractive versus those benchmarks.
Due to those low multiples, we’re estimating that CNIC can deliver 21% earnings accretion from this transaction in 2021 and 23% earnings accretion in 2022 which is obviously very attractive. That’s before we’re counting any of the synergies that the company is targeting which they’re estimating to be about $1 million.
So, overall, our view is that the company is consolidating the domain market at attractive valuations by delivering synergies and improving many of the target companies that they’re acquiring so it’s looking quite good.