New Buy tip in the Investors Chronicle8 Sep 2021 09:14
Tipped in the IC this week:
"CentralNic offers growth and cash generation.
Both its domain names and online marketing business have grown in the first half of the year.
Net debt down slightly despite two acquisitions.
Recurring revenue makes up 99 per cent of its business.
CentralNic (CNIC) sells, registers and trades internet domain names. It added an online marketing segment to the business with the acquisition of Team Internet at the end of 2019, before adding Codewise in November 2020. Based on its half year results, this strategy is delivering. Organic revenue growth for the business was 20 per cent and the online marketing segment grew organically by 28 per cent.
CentralNic is a registrar that sits between the registries and the people that want a domain for their websites. It essentially receives payment as an intermediary. But it isn't a one-off payment though, it’s a subscription. Customers will pay annually for the domain and this is why it is such a cash generative business, with a high rate of recurring revenues. Domains contributed $78.3m (£57m) of revenues (45 per cent of total) in the first half of the year.
Online marketing made up the other 55 per cent. This section of the business uses data from websites to match buyers and sellers of ads. So once the business has supplied a domain name to one of its customers, CentralNic can then sell its marketing services to help them find the best websites to advertise on. It says it uses machine learning algorithms to do this, but it doesn’t collect any personal data – so is not affected by the incoming ban on third-party cookies.
The business is also addressing a growing market. According to data from Global Industry Analysts, there were 379m domain names registered at the end of 2020 and it is expecting this to rise to 558m by the end of 2026 due to the pandemic’s acceleration of business digitisation. On top of this, the business model is scalable. The gross margin is 32 per cent and this should improve as the synergies of its acquisitions filter through. It is also highly cash generative, with operating cash conversion of 126 per cent.
Management expects full-year profits to be “at least at the upper end of market expectations”, which helped its shares price jump 5 per cent on the morning of the results.
Something to look out for is net debt, which is now $83.8m because of bond issuances to fund recent acquisitions, but this is set against strengthening operating cashflows. FactSet consensus gives a forward price earnings ratio of 12.5, hardly prohibitive given growth prospects. Buy."
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