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CentralNic Group

CentralNic “Operating cash conversion high due to positive working capital” says Edison

Consolidating a growth market

CentralNic Group (LON:CNIC) is executing on its strategy to build a global domain name and web services provider, acting as a consolidator in a fragmented market. Its key focus is expanding in emerging markets, where internet penetration is lower than in developed economies and the growth rates are higher. The company has spent £41.7m on acquisitions in FY16–18, and a further US$28.9m so far in FY19 (note the company’s reporting currency changed from pounds sterling to US dollars in FY19). Management is confident of ongoing organic revenue growth and highlights a strong pipeline of potential future M&A deals.

Ambitious growth aspirations

CentraNic is an owner, operator, distributor and retailer of internet domain names. It also provides software and services across the domain name value chain. Management highlights three key growth drivers: organic growth of the internet, ie an increasing number of businesses will need websites as their customers move online, therefore CentralNic will see increasing demand; mergers and acquisitions as the company increases geographic coverage and consolidates the market; and current and future group businesses should enable CentralNic to cross-sell and upsell services to clients. Its infrastructure is highly scalable.

Strong H119 results

The company reported strong interim results: revenue increased by 225%, gross profit increased by 127% and adjusted EBITDA increased by 203%. The main drivers of growth were the acquisition of KeyDrive in FY18, effectively a reverse takeover, which has subsequently exceeded expectations at the time of the acquisition, and underlying organic growth was 6%. Following the interim results, the company has completed three acquisitions for a combined consideration of US$28.9m with a combined historical annual adjusted EBITDA of US$4.6m, representing an average EV/EBITDA multiple of 6.3x. Management indicated that FY19 results should be around the top end of current analyst forecasts at that time.

Valuation: Share price weakness

After a strong start to 2019, the share price has been weak, peaking at 68.5p in May. The current share price is a two-year low, giving EV/sales multiples for FY19 and FY20 of 0.8x and 0.7x, and EV/EBITDA multiples of 5.3x and 4.2x, respectively, a significant discount to peers, most of which are larger companies.

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