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CentralNic Group plc

CentralNic Group Plc Sale of premium domain name for US$4.5m, pre-close trading update

CentralNic Group plc, (LON:CNIC), the internet platform business which derives revenues from the global sale of domain names, has today announced that it has entered into its largest ever premium domain name sale agreement under which it will receive consideration of US$ 4.5 million.

Premium Domain Name Sale

Under the premium domain sale agreement entered into on 13 December 2016, CentralNic will receive US$ 4.5 million consideration in cash, the proceeds of which will be utilised to further accelerate growth within the Group. After accounting for associated costs and using an illustrative US$/STG exchange rate, the contribution to 2016 Adjusted EBITDA1 is expected to be approximately £2.8 million.

Pre Close Trading Update

The CentralNic Board confirmed that, as a result of this sale, the Company expects to finish the year with earnings in line with market expectations and substantially ahead of the same period last year.

During 2016 CentralNic’s wholesale division retained its position as the global leader by volume, accounting for almost one in three of all new Top-Level Domain name registrations. There are excellent prospects for future growth moving into 2017, resulting from a much larger base of domain names due to renew combined with the accreditation of the .xyz TLD by China’s Ministry for Industry and Information Technology.

CentralNic’s retail division became the Group’s highest revenue generator in 2016, augmented by the acquisition of the Instra Group in January 2016. Retail division earnings are expected to be in line with expectations in 2016, while the Group continues to focus on developing services to stimulate future growth.

CentralNic’s enterprise division has achieved record results in premium domain name trading. Progress was also made in developing software licensing and managed service revenues, although new corporate customer acquisition is taking longer than anticipated.

CentralNic Group Plc CEO Ben Crawford said: “2016 has been a transformational year for CentralNic, adding significant scale to the Group with revenues expected to grow by over 110% and Adjusted EBITDA by over 65%.

“The Group is now well positioned to continue to grow its recurring earnings businesses, notably wholesale and retail, while seeking to become an established supplier to the enterprise domain name market. We look forward to continue executing our growth strategy in 2017.”

Zeus Capital today noted:

CentralNic has announced that it has sold a premium domain name for a total consideration of US$4.5m in cash, representing its largest premium domain sale to date. The business has also issued a pre-close statement in which it confirms that it expects to finish the year with earnings in line with market expectations. While the business continues to grow recurring revenues in its Wholesale and Retail divisions, new corporate customer acquisition is taking longer than expected in the corporate market segment. Hence we have decided to defer some of the earnings growth in our projections beyond FY17 as outlined below. Despite reducing numbers in FY17, in our view, trading on 5x EV/EBITDA for next year the shares are extremely good value versus the sector. If the shares traded on 9x EV/EBITDA, which is below the sector, the price would be 74p, 58% upside to the current share price.

  • Premium domain sale confirmed. As flagged in the H1 results, we were expecting a significant sale within the domain trading business of the Enterprise division to occur within H2 and today’s announcement confirms this. The proceeds of the domain sale will be used to further accelerate growth within the business, as we expect focus to continue to grow recurring revenues. After accounting for associated costs, the EBITDA contribution from the sale is expected to be c.£2.8m.
  • Pre-close update confirms FY16 earnings in-line with market expectations.Going into today’s announcement FY16 EBITDA consensus was £5.6m, slightly below our £5.7m forecast. The business is expected to deliver impressive growth in revenues of over 110% and in adj. EBITDA of c.65%.
  • Wholesale division retains number one position in new gTLDs. As per ntldstats.com (13 Dec 2017), CentralNic has a 32.6% market share of new gTLDs, with .xyz in the number one spot with 24.6% or 6.6m domains sold. There are also excellent prospects for future growth moving into next year thanks to the MIIT accreditation for .xyz in China as announced on 7th December, as well as the large base of domain names up for renewal.
  • Retail division boosted by Instra acquisition, adding to recurring revenue.The retail division continues to perform in line with expectations and is now the largest division by revenue.
  • Enterprise division is enhanced by premium domain name sale, however new corporate customer acquisition is taking longer than expected and therefore we have decided to take a conservative view to FY17 forecasts. As several higher margin contracts within the Enterprise division are taking long than expected, as well as some reorganisations within clients of the Retail business, we have decided now is the time to take a conservative view to FY17 forecasts. We have reduced our sales forecast by 3% to £25.7m and gross margin to 36.2% (versus 39.7% previously). As a result, our EBITDA forecast reduces by 14.5% to £6.5m from £7.6m, although this still represents YoY growth of 14%.
  • As previously stated our forecasts could prove to be prudent. For example in the Wholesale business, although the scale of renewals is yet to emerge, of the 6.6m .xyz domains, for every 1% that renew, CentralNic receives over £0.1m in EBITDA (based on current renewal prices).
  • Valuation. CentralNic is trading on an EV/EBITDA of 6.6x to Dec 16 falling to 5.0x to Dec 17, and P/E of 13.6x to Dec 16 falling to 11.7x, a significant discount to its peers. Given the growth prospects of the business, coupled with the strong operating cash flow characteristics, the impressive track record being built by management via successful acquisitions and the diversification of the business, we feel the shares offer investors a value opportunity given the industry backdrop, where CentralNic’s listed peers are typically capitalised in the billions of dollars.

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