Share idea for your consideration – CentralNic
Source: The Motley Fool (blog), August 11, 2015. http://boards.fool.co.uk/share-idea-8211-cnic-centralnic-13251940.aspx
Share idea for your consideration. If it matches the performance of my NFSC 2015 entry BDI (Bond International) then I’ll be pleased.
Share price decimated…
CentralNic (CNIC) who are profitable and cash generative, listed on AIM in September 2013 following a placing at 55p which valued the company at £32.5m. The market were hooked on the story initially, the share price doubling to 112p by October 2013. However, the share price then went into freefall, with the chart resembling a ski slope since, bottoming at 22p in April 2015.
While the company hadn’t put a foot wrong, speculators were simply expecting CNIC to be a big player in the new gold-rush & bid the stock up accordingly.
As they bounced along the bottom in April 2015, I decided to take a maiden stake and cross my fingers tightly for a positive outcome on release of 2014 results, which I believed would prove that the poor market sentiment was unwarranted. That turned out to be the case & the share price has since stabilised & risen marginally from these lows despite a couple of further upbeat announcements in recent months.
CNIC are currently 35.5p (35p bid-36p offer…with an UT trade going through after Friday’s close, so you may think they’ve jumped to 39p if perusing any share price sites).
The current share price is a far cry from the 112p high achieved 2-years ago, despite the company expanding their offering through acquisition and delivering to plan. Considerable work has gone into developing the infrastructure & business model, and I’ll discuss the financials after explaining a little bit about the company and market opportunity from my perspective.
What do they do, I hear you cry?
Essentially they are one of the world’s leading registry service providers (RSP) for internet domain names. As they mention in their website blurb;
“CentralNic uses our in-house developed IT platform to distribute our own portfolio of 24 domain names including .uk.com, .us.com and .cn.com(China) to a global network of “1,500 registrars” (retailers such as Network Solutions, LLC), which sell these to end users. We also use this platform to sell domain names owned by third parties including .la for Los Angeles, .pw and .com.de (Germany). Further, CentralNic provides consultancy services to companies seeking to create their own domains.
Our powerful registry engine has an eighteen year track record of uninterrupted and unblemished service, and it is supported by innovative marketing and personal customer service. Additionally, our flexible and scalable platform is above ICANN specification for new TLDs.”
…now in English please
As background there are over 300m internet domain names in existence today with volumes having grown by 1.5-2% annually (essentially the .coms we all are familiar with). This equates to an increase of 4-5m domain names per quarter worldwide.
Until 2014, only 22 generic Top Level Domains (gTLDs) existed, and to date the market is dominated by a handful of TLDs, most notably .com (120m domains); .net (15m domains) and .org (10m).
Assignation of new gTLDs began in October 2013, opening up the possibility of thousands of gTLDs materialising over time and enabling the market entry of hundreds of new gTLD owners (registries). These changes combined with a relaxation of restrictions on the cross-ownership of registries and registrars, is driving growth in the gTLD market.
Many of the new registries emerging as part of the substantial broadening of the gTLD market are choosing to outsource some of their required activities to Registry Service Providers (RSPs) – this is where CNIC come in – and include the provision of an IT platform to manage the domain name system for wholesalers & domain registrars, such as Go Daddy which successfully listed on the NYSE in April 2015 and is now worth a chunky $4billion! RSPs typically take a share of the wholesale value of each domain name sold.
The current annual renewal value of the pre-existing domain name market is over $4bn & it is envisaged that ICANN the industry body will release some 1,400 new gTLD’s into the market.
c.550 have been released so far & CNIC with their global wholesale network of over 77 countries will be a leading wholesaler & exclusive registry service provider for at least 38 (more pending) new gTLDs, as well as 36 legacy domain extensions.
There have been c.7m domain names registered under the new gTLDs to date. From my notes and observations approx. 2m gTLD’s have been registered between April and end of July 2015. Sounds a significant sum BUT this is well below ICANN’s forecast of 15m by mid-2015.
Where do CNIC fit in?
Astonishingly CNIC are currently number two in the global market by volume of new gTLD domain names sold. Yes, they are hobnobbing alongside the likes of Verisign who are valued at $8 billion market cap ( .com registrar) & Donuts.Inc which is number 1 in new gTLD’s sold by volume & also likely to be a member of the $billion club.
Before I go any further I’m not suggesting that they should be valued in the $ billion arena…just that I believe they are punching above their weight & have carved out a lucrative niche.
As mentioned, CNIC is now on a far more reasonable rating following its share price returning to earth with a bump, having spent the last year building & investing in its infrastructure for the gTLD market which although still in its infancy, is forecast to grow considerably during the reminder of the decade, albeit at a slower rate than first anticipated IMHO.
Financials
Peel Hunt consider that CNIC have a leading position in this expanding market due to the considerable expansion of new generic Top Level Domains (gTLDs) which has opened up the market for registry services and increased the pressures on enterprises to manage their domain name estates. As new gTLD domain name volumes increase, CNIC is expected to benefit from strong operational gearing, with Peel Hunt indicating that they will enjoy EBITDA margins approaching 40% by 2017.
The company has a low capex & w.c. model which should result in strong cash conversion, forecast at around 90% of EBITDA, supporting high free cash flow yield projections.
Operating margins are forecast to increase from 21% in 2014 to 27% in the current year.
Clearly as the business builds scale the cashflow will only get stronger as customers pay in advance for the domain. They should also be beneficiaries of repeat or recurring revenues via annual renewal of domains.
On 28.04.2015 FY 2014 results were released & in-line with forecasts
http://www.investegate.co.uk/centralnic-group-plc–cnic-/rns/final-results/201504280700084614L/
Financial Highlights:
- Revenue £6.07m (2013: £3.05m)
- PBT £520k
- Adjusted EBITDA £1.72m (2013: £1.02m)
- Adjusted Diluted EPS 0.56p
- Net Cash £3m
- Net cash-flow from operating activities increased to £1.41 million
- Ranked as the world’s Number Two new TLD registry provider by volume – launched 8 new generic Top-Level Domains during the year, including the leader by volume, .xyz (more of this below)
The Investment Case
CNIC have focused on 3 profitable operating divisions:-
(1) Registry services – Services the registry market through management & wholesaling of domain names via its automated proprietary platform to a global network of retailers. It also offers a range of consulting & sales and marketing services to Registry Operators for both the new gTLD & legacy domain markets.
(2) Registrar services – Sells domains directly to end-users through its retail websites, augmented by the acquisition of domain name retailer, Internet.BS. that it acquired following the AIM listing.
(3) Enterprise services – Supplies software & consulting services directly to enterprises & governments. This division also includes the company’s aftermarket sales of some of its portfolio of 20,000 premium generic domains.
I believe that CNIC may soon capture the global gTLD registry provider number 1 position as it’s narrowing the gap on giant, Donuts.Inc, with the latter holding a market share of 21% (1.4million domains registered) & CNIC holding 19.6% (1.31m domains registered) which were the stats I noted last week (as at 31.07.2015).
This week they’ve closed the gap further, with Donuts.Inc holding a 20.7% share (1.41m domains) versus CNIC’s 19.9% (1.36m domains). Link below confirms this data & indicates the strength of the .xyz domain.
So, I’d sum it up by saying that CNIC are performing well in the gTLD market….which is growing at a pedestrian rate compared to that forecast. “When?”, or more importantly, “Will?” the considerable growth materialise???
I’ve absolutely no idea, but the perceived view is that over the medium to long term demand for TLDs is expected to be driven by the rising number of internet users, particularly in emerging markets, and website adoption by small businesses and start-ups in both emerging and mature markets. There have been hundreds of brand-related TLD applications made and expectations are that the launch of these will increase end-user interest and awareness. I would be pleased to learn any other views.
In 2014, CNIC invested $1.6m for a 12% stake in Accent Media, which holds the rights to the new .tickets gTLD. As part of the deal, CNIC became the exclusive RSP and a retail partner for .tickets . It is hoped that .tickets will provide confidence to the online ticketing market, which has ongoing issues surrounding fraudulent ticket sales. Only validated artists, venues & commercial ticket operators will be able to use the domain name and will sell via a platform that resides within their .tickets website.
.tickets extension is set to be launched at the end of September 2015.
Additionally, they’ve developed an Enterprise Services division to exploit the value of their portfolio of 20,000 premium generic domain names. In December 2014 they announced the sale of a number of premium domain names from their portfolio for $2.5m & in July 2015 announced they’d receive a further $1m from the sale of some premium content. The undernoted article speculates that it may be $1m payment for GB.com which indicates the potential underlying value of this leg of the business.
http://www.thedomains.com/2015/07/01/centralnic-sells-1-million-dollars-in-domains-was-it-gb-com/
This is more notable when watching/listening to a couple of recent broadcast links posted on the quiet ADVFN thread (thanks to battlebus) & in particular the undernoted YouTube broadcast where at 13:50mins into the conversation, CNIC’s CEO indicates that they were offered $8m for US.com & turned it down simply as it was considered to have a higher value than this.
https://www.youtube.com/watch?v=WWjRLmG8-tU
Valuation
Reminder that most of their peers are capitalised in terms of $billion’s compared to CNIC’s current market cap of £23.8m (@35.5p) which increased following the recent small placing of 5.7m shares in June 2015 that raised £2.3m (excluding expenses) at 40p which was a PREMIUM of 16% to the prevailing share price.
EV will be therefore be c. £20-£21m given CNIC’s cash generative qualities.
There was discussion in The Pub around the time of the June 2015 placing with some conflicting views that are worth reading.
http://boards.fool.co.uk/cnic-centralnic-placing-13227348.aspx?sort=whole#13227348
I believe that Peel Hunt have c.3.1p EPS pencilled in this year (PER 11.4) & 5.2p EPS (+68%) next (PER 6.8). These are the forecasts noted in Stock-o-Pedia and consistent with Peel Hunt info I have. I’m unaware if they take into consideration the increased equity mentioned in the paragraph above via the small placing in June.
Management
Details listed here,
https://www.centralnic.com/investors/governance/overview
Ben Crawford, CEO, is the face of the company since 2009, expanding their global footprint.
The under noted link finds him providing an overview of 2014 results
Major Shareholders
Details as at 29.06.2015,
https://www.centralnic.com/investors/tools/major-shareholders
In attempting to unravel the shareholding structure, management through direct and indirect holdings have a combined interest in c.59% of the equity. I would like to see this % reduce materially.
Interestingly on Friday, Livingbridge VC announced an increase in their holding to 7.8%. You may recall they were recently known as ISIS & required a name change. Livingbridge were thought to have pulled the plug on the Netcall / Eckoh merger which although a recommended deal was based mainly in very highly valued shares in the latter. Livingbridge would appear to have declined this share swap which I noted at the time as it’s unusual to see an agreed bid fail in the absence of a counter-bidder. They clearly aren’t frightened to fight their corner.
Conclusion
In summary I consider CNIC a good risk/reward proposition.
Here is my own key rationale:-
- Earnings Growth – Essentially an excellent play on earnings considerations; low PER; net cash; cash generative with increasing margins forecast & a high level of operating leverage.
- Growth of new gTLD Market – Growth expectations in emerging markets & growth in smartphones will see a plethora of new websites & businesses requiring domain names.
- Premium Domain Names – As above, the inherent value of their premium domain name portfolio which has already brought $millions in revenue.
- Acquisition target – CNICs market position & valuation based on its considerable scale & breadth of offering. Especially with thoughts on the strategic benefit to any number of their billion $ competitors (global wholesale network, supplying domain names to over 1,500 vendors in 77 countries).
In terms of peers, London listed NCC Group acquired Open Registry in January 2015. It includes a registry service provider (RSP). Cost was up to £14.9m (£7.9m initial & remainder earn-out). Open Registry generated sales of €3.7m and EBITDA of €15,000 in the year to December 2014.
The price paid provides a benchmark to compare against CNIC which generated far greater revenues of £6.07m & adjusted EBITDA of £1.72m in the same period.
& finally…
It’s worth noting that Google paid $25million for the entire . app gTLD in February 2015 & the considerable monies spent by other players in this market.
Also notable from the article that Amazon bought .buy for nearly $5 million and .spot for $2.2 million last year.
Just goes to show some of the significant (substituted for “crazy”) valuations that may be commanded in this brave new world of generic Top Level Domains!
Disclosure
I hold a few CNIC & see considerable upside over the next few years should gTLD’s take off. Even if they don’t, CNIC’s stable registry business, cash balance and cash generative qualities suggest they are a good risk/reward investment IMHO.
Please DYOR
Kind regards,
GHF