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.
CentralNic operates in a growing low-value, high-volume technology-enabled global market (total addressable market c US$30bn) where clients typically pay annual subscriptions upfront (c 100% cash conversion). Customers tend to be very sticky, and the longer they stay, the stickier they become (92% repeat revenues). CentralNic operates a leveraged ‘buy and build’ model, with organic growth supplemented by M&A, offering domain registry and related internet services to SMEs and corporates (it is the number two domain-name reseller globally).
In FY19, CentralNic completed four acquisitions, with revenues almost doubling from US$56.0m in FY18 to US$109.2m. Management intends to continue to make acquisitions, focusing on businesses with similar characteristics to CentralNic’s core businesses (recurring revenues, high customer stickiness) in the domain name space or adjacent markets. These will be integrated through a robust, automated M&A process, with a shared service approach as management pushes for higher value-added services to drive organic growth over the next three years. Management has visibility on a pipeline of future M&A deals consisting of hundreds of peers and competitors through sector insight and existing relationships.
Despite an impressive historical growth track record (five-year revenue CAGR of 69%), being a resilient business with 90%+ recurring revenues and offering a proven management team with significant M&A experience, CentralNic continues to trade at a material discount to its global peers. As discussed in more detail in our recent initiation note, CentralNic’s shares trade on an FY20e P/E of 15.8x, a material discount to our global peer group, with our DCF highlighting further upside. As CentralNic consolidates a fragmented market of sub-scale, cash-generative business, we expect M&A to bring multiples down further.