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Slovakian acquisition the latest piece in CentralNic's global puzzle

CentralNic has global ambitions and the purchase of a Slovakian top-level domain name business is the latest part of that growth plan
Slovakian acquisition the latest piece in CentralNic's global puzzle
The name game appears to be a uniquely profitable one for CentralNic

What does it do?

Centralnic Group PLC (LON:CNIC) is a wholesale, retail and enterprise supplier of domain names and other, associated services.

For the uninitiated the top-level domain (TLD) is the label given to the very last section of an internet name, located after the last dot – so suffixes such as .com, .org and .gov.  

Back in 2011 a body called the Internet Corporation for Assigned Names and Numbers (ICANN) ended the restrictions on naming TLDs, ushering a new era for many companies such as CentralNic that had prepared properly for this revolution.

Domains using the new TLDs rose from 11mln at the beginning of last year to 27mln at the end with CentralNic riding this wave. It is now the number-one provider with market share by volume currently around 32%, up from 20%.

The Chinese market accounted for 60% of all new top-level domain sales globally and the AIM-listed company was the biggest non-domestic wholesale provider there with exclusivity over .xyz, .site, .ink and .design.

Joining the world leaders

CentralNic’s longer-term vision is to “join the ranks of world leaders in its industry, which include a number of multi-billion-dollar companies”.

It also sees consolidation opportunities and chances to broaden its “service offering”.

WATCH: 'Our growth is very encouraging' says CEO

Its growth strategy will focus on developing and scaling up its software platforms, while concentrating on growth areas including China.

Acquisitions are also, potentially, on the cards but they must “meet clear strategic criteria including being earnings accretive in the short term with a strong recurring revenues base”.

“With support from our investors, we look forward to continuing the evolution of our business in 2017, scaling up to meet the demand for domain name services as it grows globally," said CEO Crawford.

SK-NIC addition part of that global growth strategy 

Speaking of acquisitions, CentralNic has snapped up Slovakian domain name manager SK-NIC for up to €26mln.

The AIM-quoted outfit is paying an initial €21.27mln for SK-NIC – which manages the top-level domain for Slovakia, .sk – plus up to a further €4.85mln in future milestone payments.

READ: CentralNic ticks higher as it unveils €26mln acquisition 

WATCH: Boss Ben Crawford discuss Slovakian purchase...

The move is the latest part of CentralNic’s strategy to expand into new territories and build up its product offering.

CentralNic said the purchase, which is set to complete in September, would be double-digit earnings-enhancing in the first full year of ownership.

Given that the majority of Slovakian companies and websites use the .sk domain and 77% of those renew their licences every year, SK-NIC will increase the visibility and predictability of group revenues.

‘Acquisition another step forward’

“SK-NIC is a major, earnings enhancing acquisition for the group, which is wholly consistent with our growth strategy,” said chief executive Ben Crawford.

“The .sk country code adds a substantial new product and SK-NIC's network of over 2,100 local retailers extends our geographic footprint into an important new market with considerable growth potential.

“The acquisition of SK-NIC moves us another step forward in our strategy to increase substantially the proportion of group revenues generated from recurring revenue streams spread across diversified products, territories and customer types.”

Full-year performance on track

CentralNic is due to report its interims in early September but it's  already given investors a little taste of what’s to come.

Revenue for the six months ended 30 June is expected to come in 19% higher at £10.59mln (H1 2016: £8.93mln), with underlying earnings (EBITDS) jumping 50% to £1.37mln (H1 2016: £908,000) on a constant currency basis.

As for its cash position, that remained healthy at £9.57mln as of the end of June, although CentralNic said it would be dipping into that to pay for some of the SK-NIC acquisition.

“Given the consistently heavy second-half weighting of results in recent years, the board is confident that the company is on track to meet market expectations for the full year to 31 December 2017."

Broker's take on the stock

Zeus Capital said CentralNic’s financial performance was in line with expectations, although it thinks forecast revenues of £25.7mln and adjusted EBITDA of £6.5mln for the current year may prove a little “prudent”.

The shares are up 40% or so in 2017 to just shy of 68p each, although the broker thinks they're relatively undervalued comapred to some of CentralNic's peers.

“Given the growth prospects of the business, coupled with the strong operating cash flow characteristics, the impressive track record being built by management via successful acquisitions and the diversification of the business, we feel the shares offer investors a value opportunity given the industry backdrop, where CentralNic’s listed peers are typically capitalised in the billions of dollars,” he said in a note to clients.

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