Tip of the Week in the IC14 May 2020 12:12
Here's the IC's Buy tip from Friday at 89.5p:
"CentralNic (CNIC) sells, registers and trades internet domain names and more recently has moved into providing advertising services for owners of premium domain names. Given online addresses serve as a backbone for digital infrastructure, demand has remained resilient during the recent market turmoil, with more activity than ever being conducted online as a consequence of lockdown. What’s more, by diversifying its business CentralNic is improving its growth prospects and while forecast earnings are relatively small for now, it has found a place in our Ideas Farm broker up
In 2019 acquisitions increased its exposure to domain-related software and services. Of particular note was the $48m (£39m) purchase of Team Internet at the end of 2019, which takes CentralNic into the business of optimising revenue for premium “direct navigation” domain investors.
It’s $30bn addressable market has many small independent players, which means there is significant scope for CentralNic to grow through acquisitions. This underpins its strategy to become a leading global domain name and web services provider, growing revenues on a relatively fixed cost base. In total, CentralNic acquired four businesses over the course of 2019, expanding its customer base by 45 per cent. And it is keeping an eye out for potential takeover opportunities thrown up by wider market turmoil. This has meant that its maiden dividend has been deferred in order to preserve capital for deals.
One of the reasons the company has so far seen little disruption to its business from coronavirus is that 92 per cent of revenue is recurring, with around four-fifths of sales accounted for by annual fees. Its customer base is relatively diverse, with its top customer accounting for less than a tenth of overall sales, which should also help reduce risk.
Its reseller business, which involves selling third-party registered domains, is the largest division by revenue and grew by 122 per cent in 2019. It is number two in the world by volume. The division operates platforms for resellers, hosting companies and telecom companies under the brands Key-Systems, Hexonet, PartnerGate, TPP Wholesale and Toweb – and now has started to sell services such as Microsoft’s (US:MSFT) Office 365 and Amazon's (US:AMZN) cloud hosting services.
The group did concede that new wins are slowing due to the tough economic environment. But it is worth noting that wins are typically few and far between in the industry, given the time-consuming nature of switching domain providers. That said, client wins last year included .blog, the ccTLD .bh, MarkMonitor, ZDNS, and Automattic. Organic growth also benefited from increased business from its existing customers.
IC View
CentralNic does not expect to be severely affected by coronavirus and is well positioned to utilise the market sell-off to pick up smaller companies, complementing its growth strategy. Trading in the f
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