CentralNic Group — VGL acquisition follows a strong FY21

CentralNic’s FY21 results confirm what was disclosed in the two trading updates since year end. Driven by its investment programme, CentralNic delivered 39% organic revenue growth, with FY21 gross revenues rising 71% to US$411m (FY20: US$240m). Net revenues rose 58% to US$118m (FY20: US$75m), with gross margins stepping down to 29% (FY20: 31%). Adjusted EBITDA rose 57% to US$46m (FY20: US$31m), with margins contracting to 11.3% (FY20: 12.2%). The reason for the tightening margins was the continuing growth of its privacy-safe Online Marketing solution, with revenues growing 133% y-o-y (to US$261.3m) versus 17% for Online Presence (to US$149.3m). Online Marketing now represents 64% of group revenues and 55% of gross profits (before VGL), with gross margins of 25% versus 36% for Online Presence.

On a statutory basis, CentralNic reported an FY21 PBT of US$1.6m (FY20: loss of US$11.8m), leading to a loss after tax of US$3.5m (FY20: loss of US$10.9m) and a basic EPS loss of 1.6 cents (FY20: loss of 5.5 cents). This compares to FY21 adjusted PAT of US$26.8m (FY20: US$19.6m) and FY21 adjusted EPS of 11.8 cents (FY20: 10.0 cents). We include the 16.9m remaining shares held by the employee benefit trust in the fully diluted EPS, but because they are non-voting shares, we do not include them in the basic EPS calculation.

Given the c US$30m difference between reported and adjusted earnings in FY21, we note that adjusted earnings exclude non-cash charges and non-core operating expenses related primarily to acquisitions, integration and other related costs not incurred as part of the underlying trading performance of the group. The primary adjustments relate to amortisation of intangibles, non-core operating expenses and share-based payments (Note 7 to the accounts).

CentralNic reported adjusted operating cash conversion of 116%, with recurring revenue products contributing over 99% of revenues. This strong cash conversion contributed to a fall in net debt to US$75m (gross interest-bearing debt of US$131m, cash of US$56m) from US$85m for FY20, despite CentralNic making four acquisitions with a combined value of US$18m in FY21 and the settlement of US$2m of deferred consideration.

Management expects to continue its M&A-driven strategy, consolidating a large, global and fragmented market.

The group’s segmental reporting has simplified considerably over the last few years, with CentralNic now reporting on two core divisions:

VGL Verlagsgesellschaft (VGL) is CentralNic’s largest acquisition to date, lifting CentralNic’s FY21 pro forma revenues and EBITDA to US$471m and US$58m, respectively.

VGL is an online marketing business working principally with German e-commerce companies that delivered 65% organic growth in FY21. Management expects future annual growth to be above that for the CentralNic group, but slightly below that of the Online Marketing division. With FY21 gross revenues of US$55.3m and adjusted EBITDA of US$10.9m, FY21 margins were 19.7%, significantly above CentralNic group margins (FY21: 11.3%) and those for Online Marketing.

CentralNic has paid €60m upfront (net of cash on the VGL balance sheet), with an earn-out of up to €38m payable over the next three years. The acquisition multiples for the initial consideration are 1.2x FY21 sales and 6.2x FY21 EV/adjusted EBITDA. Management expects the deal to be ‘double-digit’ earnings enhancing for FY22, before synergies.

The acquisition has been funded through a £42m placing at 120p per share, as well as a €21m bond issue, together with a £3m open offer (due to complete on 21 March 2022, also at 120p per share), Together, these have funded the €67m initial cash consideration, with the earn-out expected to be funded from operating cash flows.

The placing has led to the issue of 35m new shares (with a further 2.5m due to be issued under the open offer), taking the total number of voting shares to 269.2m (286.6m fully diluted, including 17.4m non-voting shares held by the employee benefit trust). In total, the new shares will represent c 14% of the enlarged voting share capital.

At 31 December 2021, CentralNic had US$117m of outstanding bonds. With a further c US$23m added through the acquisition of VGL, there are a total of US$140m of bonds outstanding post-VGL. Management has indicated there is an opportunity to refinance these bonds between H222 and Q123. The bonds were issued in 2019 when the group was smaller and less well established, with a coupon of 7% above Euribor. As such, management hopes to attract considerably better financing terms, with recent tap issues confirming demand at a 5% coupon and below. A saving of 2% on US$140m of bonds would equate to annual interest savings of over US$2.5m.

Despite the early stage of the year, management guidance is for FY22 revenues and adjusted EBITDA at or above the high end of analyst expectations (FY22 revenues US$469m and adjusted EBITDA US$51m), before factoring in the impact of the VGL acquisition, which delivered FY21 revenues of US$55m and adjusted EBITDA of US$11m. In line with management guidance, and incorporating VGL, we have updated our estimates for FY22/23.

As a result, we have revised our estimates, reflecting the following principal changes:

In our note, A scaling player in online services, we discussed the first three acquisitions of FY21: SafeBrands (Direct), a French-based brand protection software provider for US$3.7m (plus a US$0.7m earn-out); Wando Internet Solutions (Online Marketing), for US$13.0m in cash (including a US$6.5m earn-out); and a publishing network of revenue generating websites from White & Case for US$6.5m in cash (Online Marketing).

CentralNic completed one more acquisition in FY21, with two further small deals in FY22:

With a compelling mix of sticky revenues, strong cash conversion and high growth, CentralNic continues to offer an attractive balance of growth at a reasonable price.

In its latest 2022 index, the Financial Times listed CentralNic as one of the top 250 fastest-growing companies and among the top 50 fastest-growing technology companies in Europe, with a CAGR of 73% over the past seven years, since its AIM IPO.

Whether we compare CentralNic to web services (CentralNic’s Online Presence) or online marketing companies, the group continues to trade at a material discount to its peers, despite the growth it has delivered in FY21, organic growth of 39% and 71% overall revenue growth. Including VGL, we see FY22 revenues of US$522m, or 27% prospective growth year-on-year.

With the superior growth of Online Marketing, which we expect to continue for the foreseeable future, the group is leaning ever more heavily towards digital marketing. We have identified a combination of European and North American peers and are choosing to disregard the large-cap peers, focusing instead on those companies with an enterprise value below US$3bn (Exhibit 4).

Average current year sales growth for the peer group is c 17%, with average EV/EBITDA multiples of 11x and 9x for FY1 and FY2, respectively, and P/E multiples of 26x for FY1 and 21x for FY2. We estimate that CentralNic will deliver 26% sales growth in FY22 (post VGL), meaning it would offer amongst the strongest growth in the group and yet trades on an FY22 P/E multiple of 10.9x and an FY23 P/E multiple of 9.7x, a discount to the online marketing peer group averages of c 30%.

Given the group’s domain name and web services origins, we also look at international web services pers. Disregarding Verisign, which we include for completeness, the web services peer group in Exhibit 5 trades at average EV/sales multiples of 2.3x for FY1 and 2.1x for FY2 and EV/EBITDA multiples of 8x for FY1 and 7x FY2. In terms of P/E, the peer group trades at 16x for FY1 and 14x for FY2, with CentralNic trading at a c 30% discount.