During the first six months of FY18, CentralNic (LON:CNIC) has delivered strong underlying organic growth as it continues to deliver against the long-term strategy of building recurring, high quality revenues. In terms of headline numbers, sales have increased by 5.5% to £11.2m (H1 17: £10.6m), while gross profit increased by 30.7% to £3.9m (H1 17: £3.0m), with margin increasing from 27.9% to 34.6%. Adj. EBITDA, excluding FX gains/losses, increased 65.3% to £2.3m (H1 17: £1.4m). The acquisition of SK-NIC in December 2017 brought quality, high margin, recurring revenues to the Group and this has been reflected in the H1 numbers.
Post period-end, CentralNic completed the transformational $55m acquisition of KeyDrive as well as the bolt-on acquisition of GlobeHosting, both of which further improve the quality of earnings with 90%+ recurring revenues. Importantly, the integration of KeyDrive is progressing as planned across all working groups, and the business remains on track to meet full year market expectations. No change to forecasts.
Focus on ROI and margin, as per Group strategy, meant profit up while revenues down in Retail. The Retail division generated revenues of £6.8m (H1 17: £8.0m) and EBITDA of £1.3m excluding FX headwinds (H1 17: £1.1m). This was in line with expectations as the division realigns and optimises its online marketing strategy for improved profitability.
Wholesale division maintains its lead of new TLDs globally with 20.8% market share, c.5.3m domain names. The Wholesale division generated revenue of £3.9m (H1 17: £1.8m) and EBITDA of £1.6m (H1 17: £0.55m) excluding FX tailwinds of c.£0.3m, of which £0.7m came from SK-NIC implying underlying growth in profitability of c.20%. The division continues to evolve reflecting demand for heavily promoted, low priced TLDs with high volumes offsetting lower per domain revenues. CentralNic now supports eight out of the top 25 new TLDs from a total of 1,224, while domain renewals now account for 25% of new TLD transaction volumes versus 18% in H1 17, and 20% of overall domain transactions (H1 17: 15%).
Premium sales now removed from Enterprise, focus now on recurring revenues. Enterprise contributed £0.5m revenue (H1 17: £0.8m) and EBITDA of (£0.1m) (H1 17: £0.2m), in line with expectations as one-off premium sales are significantly reduced. The addition of KeyDrive’s BrandShelter will transform the division to the same recurring revenue model as the rest of the company, and provides significant opportunities for future growth.
KeyDrive H1 18 in line with management expectations. Although not part of the Group in H1, KeyDrive generated revenues of $31.8m, gross profit of $5.5m and adj. EBITDA of $3.3m which was in line with expectations.
Valuation. To December 2019, CentralNic is trading on a P/E of 12.5x (fully diluted) falling to 11.4x and EV/EBITDA of 7.9x falling to 7.2x which is undemanding given the high quality of earnings. Our estimate of fair value, based on 20% discount to the average of the global domain industry peers and similar UK tech companies, implies a share price of 111p.
