CentralNic’s capital markets day (CMD) on 24 June 2020 introduced the divisional management team and provided insight on each of the three key segments as they will report in FY20: Indirect (Wholesale, Registry); Monetisation (Team Internet); and Direct (Retail, Corporate). We have picked out what we believe are the four key themes from the CMD: FY20 performance, COVID-19 and seasonality; organic growth; M&A; and, pulling it all together, the benefit of scale. CentralNic continues to trade on an FY20 EV/EBITDA of 9.1x and a P/E of 15.8x, a material discount to its peer group, with our DCF indicating further share price upside. M&A could bring CentralNic’s multiples down further.
Companies: Centralnic Group
CentralNic's CMD gave us new positive insights into the company's investment case. CentralNic's organic growth is stronger than we thought, the Direct division generates high ROI, the monetisation market was shown to be critical to the domain name market, Team Internet's market leadership was further reinforced and acquisition opportunities were shown to be larger than anticipated. These investment views are not reflected in CentralNic's low valuation multiples, in our view.
With four acquisitions in FY19, CentralNic is a leading buy and build player in the domain name space, focused on consolidating a fragmented market. It offers a broad range of internet services, including reseller services, where it is the number two provider globally, as well as internet services to corporates and SMEs. Supported by underlying organic growth (6% company estimate), CentralNic has grown at a revenue CAGR of 69% from 2014–19 and has attractive cash flow dynamics with near 100% cash conversion and 92% repeat revenues. Q120 was in line with expectations and management has yet to see a material impact from COVID-19. The company is valued on an FY20 EV/EBITDA of 9.1x and a P/E of 15.7x, a 55% discount to its peer group, with our DCF indicating further share price upside. M&A should bring CentralNic’s multiples down further.
With four acquisitions in FY19, CentralNic is a leading buy and build player in the domain name space, focused on consolidating a fragmented market. It offers a broad range of internet services, including reseller services, where it is the number two provider globally, as well as internet services to corporates and SMEs. Supported by underlying organic growth (6% company estimate), CentralNic has grown at a revenue CAGR of 69% from 2014–19 and has attractive cash flow dynamics with near 100% cash conversion and 92% repeat revenues. Q120 was in line with expectations and management has yet to see a material impact from COVID-19. The company is valued on an FY20 EV/EBITDA of 9.0x and a P/E of 12.4x, a 65% discount to its peer group, with our DCF indicating further share price upside. M&A should bring CentralNic’s multiples down further.
After completing six acquisitions over the last two years, CentralNic has diversified its market exposure and significantly improved its competitive position. In this report we provide an update of the company’s markets and its competitiveness within each market. We conclude that CentralNic’s increased scale and broadened market exposure puts it in a strong position to consolidate the market and deliver further synergies to investors. We provide our estimates for H1 2020.
2019 results demonstrated consistent organic growth, strong delivery on acquisitions and high cash conversion. We believe there is upside to 2020 expectations since our forecasts are below Q1 run rates, historic growth trends and acquisition synergy targets. In addition, CentralNic appears well positioned to complete more earnings accretive acquisitions. The company is developing a track record of successful execution while the current environment makes more acquisition opportunities available.
We expect a solid set of 2019 results and a confident outlook from the company on 27 April. We believe our 2020 forecasts are prudent, factoring in only 4% revenue growth and no EBITDA margin improvement on a pro forma basis. We believe the company is fundamentally well positioned to grow even in the current environment. CentralNic is supported by high recurring revenues, products that are critical to online infrastructure and a growing underlying market. The company’s resilient growth prospects and conservative earnings expectations make its 9x EV/ 2020 EBITDA multiple highly attractive, in our view.
CentralNic's business is resilient in the current environment. The company has mostly repeatable revenues and sells mission-critical products, diversified across many customers and countries. Market growth is robust, benefiting from the recent surge in online activity and regulated price increases. Competitively, the company is well positioned, dominating its core markets. Financially, the company has adequate financing and has not experienced any increase in late payments. CentralNic’s resilience is reflected in a confident trading update this morning.
The company announced several appointments that have strengthened the management team after seven acquisitions over the past two calendar years. We believe this investment in management should form a strong foundation for the company’s next phase of growth. Alex Siffrin, the company’s largest shareholder, has stepped down from the board to focus on personal priorities
An update on Team Internet confirms the turnaround in trading anticipated by management at the time of its acquisition. In addition, the company indicated that overall trading so far this year has been resilient. Shares trade at only 7x EV/EBITDA.
CentralnNic have released a positive trading update this morning, confirming trading for 2019 to be in line with expectations. We update forecasts to reflect the successful completion of the acquisition of Team Internet. We reduce our assumptions regarding the contribution of Team Internet to the forecast period compared to November reflecting a lower EBITDA run rate reported in Matomy Media’s Q3 update in December. We also review our FX assumptions, taking a slightly more conservative view. We now expect adj. EBITDA in 2020E of $31.5m, growing to $33.1m in 2021E, this represents a 37.3% earnings accretion in 2020E and 28.1% in 2021E compared to pre-acquisition EPS forecasts. 2019 was a very active year for the group from an M&A perspective and clearly, they have made significant progress scaling and diversifying the business. The shares have responded well to this, reaching an all-time high of 91p in December 2019. We see potential for a further rerating as the acquisitions are integrated and potential synergies are realised.
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The FY 2020 results are in line with our expectations and reflect the impact of the previously announced switch from large perpetual licences to recurring annual term licences during the year. Despite the COVID strictures, with its large global partnerships, D4t4 continues to close numerous lucrative data gathering and data management contracts with major blue-chips around the world. It is successfully converting a high proportion of its new sales to recurring revenue contracts, but this will sacrifice growth and earnings in FY 2020 and FY 2021. Nevertheless, with growing recurring revenue base, an exciting pipeline and a very strong balance sheet, D4t4 is very well positioned for continued long-term growth and security.
Companies: D4T4 Solutions
The ‘Moving Forward Act', the strongest automotive safety bill in decades, has now been passed in the House of Representatives. The bill is focused on advancing safety technologies proven to reduce crash and harm and to make sure strong safety standards are in place to save lives. The bill, which now needs to be passed in the Senate, will mandate automatic braking, lane-keeping, blind-spot detection, event data recorders as well as DMS in all cars and trucks sold in the US from 2024. This aligns with the European General Safety Regulation, which passed into law in November 2019.
However, in the EU, the European Association of Automobile Manufacturers (ACEA) has requested a 2‐year delay for the introduction of the 2022 Euro-NCAP protocols due to the projected lengthy time that will be needed to recover from the effects of COVID-19. Euro NCAP has agreed, and a delay is now expected to the 2022 and 2024 rating. The new dates will give automakers and Tier 1 suppliers more time to incorporate the necessary changes given the events of recent months with a number of manufacturers announcing 12 month delays to new models.
Companies: Seeing Machines
GB Group reported strong performance in FY20 and started taking measures to preserve cash in Q420. Trading in Q121 has been mixed and while management is unwilling to provide guidance for FY21, it has confidence that in the longer term it is well positioned to benefit from the acceleration in digital transformation that should drive demand for its identity data intelligence services. We have upgraded our EPS forecasts by 5% in FY21 and 3% in FY22.
Companies: GB Group
Touchstar is a supplier of mobile data computing solutions and managed services to a variety of industrial sectors. This morning, the group has provided a trading update to coincide with its AGM.
Encouragingly, the business continues to perform in line with the trends seen at the time of the full year results in May and the Board anticipates Touchstar will be profitable in the six months to 30 June. Cash generation is again reported to have been good, with ‘significantly higher cash balances' expected to be reported than at the beginning of the year (FY 2019A £850k). The group has drawdown a CBIL of £150,000, which provides additional liquidity alongside its undrawn banking facilities of £300,000. Looking ahead, the order book is a more normal level than last reported at over £500,000 at the end of June, which compares to an exceptionally strong £1.2m at the beginning of the year.
FY20 results: inline with guidance
ECSC Group plc* (ECSC.L, 71.5p/£7.2m) | Trackwise Designs plc (TWD.L, 90.5p/£20.0m) | Transense Technologies plc (TRT.L, 59.5p/£9.7m)
Companies: ECSC Group Trackwise Designs
LoopUp has provided an update on trading to coincide with today’s AGM…in essence, the group continues to see activity “materially” above pre-COVID levels, and is confident of exceeding expectations for 2020. We choose to leave our forecasts (that we believe to be roughly in line with consensus estimates) unchanged for now, in advance of further detail likely with a fuller H1 update in early July.
Companies: Loopup Group
Blackbird plc* (BIRD.L, 19.25p/£64.7m) | Mirada plc* (MIRA.L, 92.5p/£8.2m) | Tern plc* (TERN.L, 10.75p/£29.0m) | Checkit plc (CKT.L, 39.5p/£24.5m)
Companies: BIRD MIRA MIRA TERN CKT
Gresham continues to show strong progress in difficult times. 18% yoy organic growth in Clareti ARR is amongst the fastest growth of any UK software company. It is being achieved because Gresham has built a disruptive product that is now replacing incumbents at Tier 1 financial institutions around the world. These results underpin our FY20 EBITDA expectations. The implied valuation of Clareti’s ARR is <6x revs, which we think offers value for an emerging leader.
Companies: Gresham Technologies
We are introducing our Best Ideas for 2019 and also review the performance of last year’s picks. We suggest ten solidly financed stocks with good business dynamics that ought to be considered for core portfolio holdings and six UK domestically focused stocks that our analysts believe should perform strongly in the event that uncertainties unwind. We also introduce a new style of research from N+1 Singer which presents a Company’s dynamics and metrics in a clear and concise manner and concentrates on the pivotal issues affecting that Company and an investment decision.
Companies: BCA CLIN CLG CBP DNLM EAH STU FCRM FUTR GTLY INS GLE NICL SDL SPR TRI
Following the announcement of a business restructure and temporary cost reduction measures to reduce costs by A$12m, we have updated our forecasts for Seeing Machines. We believe that the significant measures taken by the management offset a weaker revenue outlook, as the impact of COVID-19 looks likely to continue for longer than anticipated. The net result is a similar to previous expectations in terms of cash, which we believe remains sufficient to see the company through FY22 ahead of profitability in FY23. The long-term effects of the business restructure is expected to be positive for shareholder value as demonstrated by our DCF based valuation which increases to 7.2p (from 7.0p).
The Coronavirus pandemic is a human tragedy of vast proportions – as well as the terrible human toll, COVID-19 has led to economies across the globe going into physical lockdown and financial freefall. Entire populations are adapting to the “stay at home” edict, to safeguard the vulnerable – and some of these changes will lead to long-lasting or perhaps permanent changes in the way we live or work. This note describes some of our client companies whose business models are well adapted to these changes, or who might see a change in long-term structural demand.
Companies: AMO BGO FDM GAMA KAPE LOOP TERN ZOO
Today’s update is a positive one and acts as a reminder of DOTD’s solid and recurring business model. Such visibility, combined with excellent profitability (30% AOP margin) and strong cash resources (£22.6m net) means the company is strongly placed for a challenging macro environment, and worthy of attention in view of indiscriminate SP weakness. At a time, when many companies are seeing sales fall, DOTD has today revealed that demand continues to grow – evidencing DOTD’s secular growth drivers and omnichannel opportunity. New business is however taking longer to convert, as events and businesses have seen disruption. Offset against this, retention has improved, as customers’ digital transformation plans have slowed. Related to this, we also highlight that key customer risk is very low, as no customer represents >1.5%/sales, furthermore sector exposure is diversified. In view of today’s update, we therefore reduce FY20E sales by £2m to £46.8m, but flag that this still implies 6% growth in H2. DOTD has meanwhile identified savings (by reallocating its marketing budget) such that FY20E profit remains unchanged. Notwithstanding the company’s solid (90% recurring) business model, we view it conservative to withdraw FY21&22 estimates, given the potential for prolonged disruption. Despite this, much confidence can be taken from the company’s strong financial profile and growth opportunities, which (we view) will be unaffected longer term.
Companies: Dotdigital Group
LoopUp recently updated on the first four months of 2020, which have seen an exceptional level of customer activity and new client wins. This is largely driven by the COVID-19 pandemic and the associated shift towards remote working with additional use of conference calls, but the group has also recently implemented an increased focus on Professional Services, which in our opinion could boost long-term potential. This note focuses on current activity levels within the business, the opportunity within Professional Services and the attitude of investors towards remote meetings companies.