CentralNic Group plc acquisition of KeyDrive transforms quality of earnings

CentralNic Group plc

CentralNic Group Plc (LON:CNIC) is acquiring KeyDrive S.A. (an existing strategic partner since 2017) for an initial enterprise value of $44.5m or c.£33.6m, with an additional earnout of up to $10.5m or c.£7.9m implying a maximum Enterprise Value of $55.0m or c.£41.5m. Founded in 1998, KeyDrive has established itself as one of the leading European companies for the distribution and management of domain names, administering over 6.0m domains via its internally developed software platform for over 1,700 retailers and 40,000 direct customers across 160 countries. The largest division of KeyDrive is its reseller platform RRPproxy, which is one of the top two providers globally with a range of blue chip customers.

The acquisition of KeyDrive is a strategic deal for CentralNic Group Plc in its evolution to becoming “the GoDaddy of emerging markets”, that adds considerable scale, transforms the quality of earnings and should lead to a re-rating. The combined entity will create a cash generative internet services business with revenues of over £75m, of which c.92% is recurring/subscription based and c.73% is from existing customers paying to retain services bought in previous years. There is scope to consolidate technology platforms to generate cost synergies, helped by the co-operation built through the businesses entering into a strategic alliance in 2017. There are also clear revenue synergies via cross-selling opportunities. KeyDrive founder Alex Siffrin will become Group COO and join the board in time, taking 100% of his consideration in CNIC shares. He will own c.24% of the enlarged business post earn out, demonstrating long term confidence in the deal.

Quality of earnings significantly improved, which should lead to a rerating. The board decided to remove “one off” Premium domain sales from its projections, so that forecasts represent the “pure play” recurring revenues only. Our pre-deal FY18 forecasts included these, therefore stripping these out reduces FD adj. EPS by c.53% from 5.2p to 2.4p. However, when all historical Premium sales are removed, FD adj. EPS actually grows at a CAGR of 34% between FY17A and FY20E from 1.9p to 4.4p. This now comprises a higher quality, subscription-based earnings stream that should command a multiple more akin to the UK peers with similar earnings profiles.

Economies of scale should be rapidly realised with opportunities for synergies and growth. In addition to the identified initial cost savings of £1.0m per annum by 2019, such as having a single reseller platform supporting all in-house retailers, we see multiple opportunities for additional revenue synergies that are not included in forecasts. There is also scope for the enlarged Group to leverage its technology platforms to continue to execute value-accretive acquisitions.

Deal metrics and valuation. The initial gross consideration of c.£38.6m comprises c.£24.0m in cash via an equity raise (mainly facilitates VC exit) and c.£14.6m in shares to the KeyDrive founder. There is also an earnout of up to c.£7.9m (up to 85% payable in shares) contingent on two-year post-deal performance. To December 2018, the deal values KeyDrive on an attractive valuation of 8.0x EV/EBITDA.

Post-deal valuation. At the placing price of 52p, under the first full year of ownership to December 2019 (FY2), the enlarged business is valued on an P/E of 12.9x (fully diluted) falling to 11.7x and EV/EBITDA of 7.9x falling to 7.2x which is undemanding given the high quality of earnings. Our valuation, based on 20% discount to the average of the global domain industry peers and similar UK tech companies, implies a share price of 100p.

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CentralNic Group Plc

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