Some of the pushback from investors has been about why the shares are therefore so cheap, for which the answer is the company is “not well understood”
Analysts at Berenberg said they remain convinced about the value in CentralNic Group PLC () and the potential for the shares to double.
The bank hosted a ‘fireside chat’ with the company to address pushbacks and queries from investors after a previous note that identified CentralNic as one of the top three shares to buy in the networking and communications subsector.
“We remain convinced about our thesis and we think the stock can materially re-rate once the online marketing segment prints high-teens growth for a few more quarters,” said a note from Berenberg analysts Bharath Nagara and colleagues.
Setting out their thesis, the analysts said virtually 100% of CentralNic’s revenue is software-as-a-service-based recurring revenue, with its legacy business of selling domain names growing organically at circa 6% annually.
“To this, we add what the market is completely missing: 1) the potential to cross-sell more value-added services, which can effectively double the top-line growth for the domain businesses; and 2) the new online monetisation business, which has the potential to grow at 20% annually and add c35% upside to our base-case 2023 EPS.”
Some of the pushback from investors has been about why the shares are therefore so cheap, for which the answer is the company is “not well understood”, being made up of a number of smaller businesses that are themselves difficult to understand.
As the company’s origins were in selling exotic, non-dotcom, domain names, investors had been sceptical about its long-term success, but the analysts said the entry into long-term contracts with fixed price increases and pass-through agreements means CentralNic’s wholesale business “today sells virtually every domain name in the world”, while the retail business can breach higher margins through selling certain sought-after names.
Answering other pushback related to the ad business, the analysts first explained that 75% of the online marketing business provides software that allows advertisers to acquire specific customers online for a target budget, with the remaining quarter coming from software that monetises websites of expired companies – known as parked domains – with ads.
“Overall, this business makes the ad market more efficient by connecting buyers and sellers of ads (especially in niche categories) and CentralNic takes a circa US$0.15 revenue share for this service,” Nagaraj wrote, with the industry-leading software using machine learning to match advertisers with high-conversion users, helping them meet their revenue target, with 24/7 recurring revenues for the AIM-listed company.
As for the valuation, applying peer multiples of leading domain businesses of around 25 times underlying earnings (on a ratio of enterprise value to EBITDA) and adtech firms around 40 times EBITDA, “investors could easily justify a price target multiple times higher than the current share price of CentralNic”, which has trades at around nine times EBITDA.
Therefore, despite the recent rise in share price to 89p, there is still circa 100% upside to the broker’s 180p target price.
