Centralnic Share Discussion Threads

[cyberbub] 16/8/2023 22:04

While noting the risks in the earlier posts, which might constrain CNIC from hitting say a 25-30x valuation, the current sub-8x seems excessively low, especially considering that the cash-machine profits are still growing, IMO. I also agree that a trade buyer would find us a very attractive meal. I'd be surprised if the company management would recommend any bids below 200p.

[adamb1978] 16/8/2023 21:25

No problem Grant, and good to consider the bear cases as well as bull. Keeps you grounded.

There's often, I find, in tech many catastrophic downside scenarios which you can come up with, such as someone deciding to produce something similar and making it freely available. You then though need to think through all the reasons why it wouldnt happen - why would that party do that, is there an economic case for them to do so, would customers take that product etc etc

I dont think this will ever be a high multiple company, but whether you value it on a PE, EBITDA, FCF yield or whatever basis, I think its worth at least 200p within 2-3 years.

re consolidation: I think its an area where, given the gross margins, you are a consolidator or consolidatee, and there isn't a placid state where nothing happens for a prolonged period. So I thikn your suggestion where CNIC get acquired is perfectly plausible and its made more likely given there's a large financial investor who won't be a long-term holder. Now that the price has recovered somewhat, I'm ok with that outcome given that putting a premium on the current share price gets you towards 200p

Adam

[ggrantsu] 16/8/2023 20:47

Its a very good point Adam - pretty spot on. Honestly, I think its something that sounds scarier than reality...it was just interesting speaking to someone a lot more versed than me on the tech world and I guess thinking about why we have such strong performance but absolutely no multiple re-rating. And I think this is our answer. I'm hoping even if we just a 2-3x notch up and then we are at 160ish...and we keep posting these strong numbers. I think we could be a similar play to Plus500...which is absolutely fine and I'm more than happy seeing a good management team create value that way. Just a slightly different upside vs. what I imagined before the frank conversation and understanding TONIC upside/downside more...think what this little company has achieved vs. all the other shambles out there. Should be much applauded.

One other thing from conversation which was interesting was really what I think would be best upside here is takeover possibilities. His view was that PE wouldn't touch this because of the client concentration (I tend to agree having come from PE)...but there is definately scope for a trade buyer here, which of course would be better for us as will be willing to pay a higher premium than stock market investor / PE buyer. I'm going to try and speak to more people in techy world to try and gauge how people might view CNIC...but the investor I spoke to definately thought that might be a high possibility.

Anyway, I'm sorry to be a bit damp vs. usual self on CNIC, but worth us all thinking about these issues.

[adamb1978] 16/8/2023 20:29

Thanks for sharing Grant. Need to contemplate more.

I would say though that I've seen the threat of a USGlobalMegaCo company potentially being able to crush someone adjacent to it many times before but rarely have seen it happen.

Simple reason is that for USGlobalMegaCo they dont have huge interest in scrambling around to pick up pennies. Their interest is in chasing the next potential trillion dollar market. They're better off letting companies in their ecosystem picking up those relative pennies and focus on the big value drivers. They won't maintain a 30x-40x PE by spending times on things which are lower margin and can't generate billions.

So, for Goole, chasing after AWS/Azure for market share in Cloud, getting Waymo in a position to compete with Tesla, Cruise any all the other companies wanting to lead in autonomous driving etc is far more important.

The comparison with PLUS500 in terms of multiples is a good one, which is why CNIC have taken the right approach to position themselves as a cash machine

Adam

[ggrantsu] 16/8/2023 19:06

Hello all...not posted here since results but as you know long time bull here.

Still am bullish but have revisited case somewhat and had a very interesting conversation with very successful tech investor had weekend who knew cnic well and was invested when it was domain names before selling up.

I think their performance this year has been really incredible...honestly so impressed by them being able to basically walk through the biggest ad downturn in 20 years unscathed. I mean talk about the art of the impossible...

Having said that...there are real risks here that I somewhat had overlooked, partly because I have such a huge position and have become pretty emotionally invested. Not company's fault...but they don't disclose online marketing split and I hadn't totally realised how TONIC is 70% of that segment. My concern all stems from TONIC...which is riding the zeitgeist currently but as a whole, is an incredibly weak business model from a barriers to entry point of view/customer concentration risk/margin standpoint...it is a business which Google could basically take away from us overnight and we have no bargaining power so ultimately the prospect of higher margins is minimal and they will likely erode. It's a cash machine for now....but ultimately (and this was the tech investors view)...we are totally constrained multiple wise because TONIC is 50% of the business, online presence is very mature, and the other parts e.g. VGL (which is a great business) etc have yet to grow out (there is clearly a pathway for them to - but we shouldn't kid ourselves...as much as CNIC boast about VGL and new partnerships in other segments, they are all de minimis right now). I think to be brutally honest, most investors will just not risk the tail risks associated with the Google reliance. It's tough...litte bit like Plus500 atm in terms of prospective multiples.

However, the news right now is very good for CNIC and its caught the zeitgeist, and I'm very impressed by the team running it and they must have good confidence re google. I'm just trying to point out that just because we are performing very well, there are underlying risks which totally constrain a much higher multiple. Be interested for others thoughts...

It would be ideal if they could get a long-term contract with google setup and signed...but sure they have been trying.

[cyberbub] 16/8/2023 16:12

Still struggling to break 132... hopefully when it does we'll have a rapid run up towards 160 IMO...

[gswredland] 16/8/2023 15:44

Thanks for posting Rivaldo

[rivaldo] 16/8/2023 13:03

The IC tip featured earlier is subscription-only, so....

"CentralNic defies advertising gloom

Can AI be the secret to growing profits against a darkening macro backdrop?
August 14, 2023

By Jennifer Johnson

Aim-listed internet services group CentralNic (CNIC) has evidently made shareholder returns a priority in the past few quarters. Its inaugural final dividend of 1p was paid out in mid-June and the company announced a second share buyback programme just a few weeks later.

This largesse has ostensibly come at a cost – with leverage growing to 1.0 times pro-forma cash profits, up from 0.9 times previously. Meanwhile, net debt increased by almost $12mn (£9.5mn) to a $68.2mn in the six months to the end of June 2023. Management does not appear to be concerned, however, particularly given the company’s growing emphasis on using artificial intelligence (AI) across its operations.

CentralNic’s online marketing business, which accounted for over 90 per cent of its first-half sales, creates AI-generated “online consumer journeys”. In practice, this means it aims to convert ad campaigns on search engines into actual ecommerce transactions. The group notes enthusiastically that this market is estimated to be worth $80bn in the US alone by 2025.

In its interim results, the company’s directors said they expect it to trade “at least in line” with current market expectations for the full year. This might be difficult for some investors to believe, given advertising budgets famously get slashed during most economic downturns. But the group is showing no real signs of a sales slowdown at present.

Adjusted operating cash conversion did fall to 94 per cent in the first half (from 100 per cent last year) – although this is hardly an overly worrisome development. With the shares trading on just 7.8 times predicted full-year earnings, there isn’t much to lose here. Buy."

[adamb1978] 16/8/2023 10:18

Hi Rivaldo

Thanks. One other point from teh call was that someone asked about a move from AIM to full listing or the US. They said that its something which they've discussed, and producing quarterly figures quickly was part of that planning such that they're operationally ready to move. In terms of a change of market in the UK, they said that they wanted to see how the upcomgin changes to listing rules etc impact attractions before deciding on that.

I dont think its imminent therefore, but would be great if they did one of these given the impact on valuation

Adam

[rivaldo] 16/8/2023 09:45

This post elsewhere from DaddyAim has some interesting snippets from the H1 presentation:

"Q&A:

• CEO revealed that CNIC is in a tender process with the UK government for “big contracts” and that RNS should follow when done -> narrative gave me confidence CNIC is in a top position to win

• CEO said that he expects the “first notable impact in Q4” from the Microsoft contract

• Regarding margins, CEO said product mix is expected to consolidate so GP margin should not erode much further

RNS: pretty positive, not much surprise following 1H udpate

• Positive outlook: "at least in line with current market expectations for the full year." Consensus: FY23 Revenue: $ 783 - 834m ; Adj EBITDA: $ 91 - 98m

• "Online Marketing and Online Presence segments, gaining market share"

• Online marketing (c. 77% group revenue) - 1H23 Revenue: +18% yoy ; KPIs were positive: The number of visitor sessions increased by 49% from 3.5 billion for TTM 2022 to 5.3 billion for TTM 2023 and the RPM remained stable at USD 100.

• Online Presence (c. 23%) - 1H23 Revenue +20% yoy ; KPIs were positive: The number of processed domain registration years increased by 7% from 12.0m for TTM 2022 to 12.9m for TTM 2023 and the average revenue per domain year increased by 6% from USD 9.83 to USD 10.46. The share of Value-Added Service revenue TTM 2023 was 7%

• New prime clients despite the current macro backdrop: • Zeropark, CentralNic's commerce media business, has announced three strategic partnerships: 1) becoming a Tier 1 Demand Partner of Sovrn, a leading publisher technology platform. 2) a significant deal with booking.com, the global online travel agency. 3) Klarna, the Buy Now Pay Later platform has become a direct publisher on the Zeropark network ; • Voluum, CentralNic's flagship ad tracker, has announced the launch of a new integration with popular e-commerce platform Shopify, allowing customers to directly feed conversion data from their Shopify stores into Voluum, bolstering their ad, product, and page performance

Remains a strong buy"

[davebowler] 15/8/2023 08:59

CNIC featured here

[rivaldo] 15/8/2023 08:09

This section from Zeus's research note yesterday is worth highlighting imo:

"Privacy trends are accelerating demand for CentralNic’s first-party, data-driven advertising solutions. Google plans to migrate 1% of Chrome users to Privacy Sandbox and disable third-party cookies in early 2024 and plans to completely remove third-party cookies in the second half of 2024. Apple has already updated its iOS operating system in April 2021 with new privacy controls that limit digital advertisers’ ability to track iPhone users across apps and websites owned by other companies (third party).

As a result of these changes, we believe brands are channelling advertising budgets towards solutions that can unlock and refine consumer purchasing intent without third party cookies. CentralNic’s Online Marketing division (particularly TONIC) can source, qualify and deliver high conversion traffic to advertisers without the use of cookies. The global digital advertising market is expected to grow 13.9% CAGR from $531bn in 2022 to $1.5tn in 2030, according to ResearchandMarkets."

[dartron] 14/8/2023 22:06

CNIC still rated a buy by IC

[cyberbub] 14/8/2023 20:57

Most of that article is clearly written by AI... Like so many articles across the media these days :-(But overall I agree with its conclusions :-)

[davebowler] 14/8/2023 17:52

hTTps://masterinvestor.co.uk/equities/centralnic-group-the-money-machine-continues-apace/

[cyberbub] 14/8/2023 17:24

Short term traders are mad, they always sell on news, any news! Still, an opportunity for some to pick up a few more cheaply ... hopefully including the buyback team? Let's see in tomorrow's RNS.

[km18] 14/8/2023 12:49

CentralNIC posted another impressive set of HY23 Interims this morning. Net revenue/gross profit increased by 11% to USD 91.2m (H1 2022: USD 82.1m), adjusted EBITDA increased by 16% to USD 44.6m (H1 2022: USD 38.6m) and adjusted EPS increased by 34% to USD 11.37 cents (H1 2022: USD 8.46 cents). Net debt increased by USD 11.6m to USD 68.2m following non-operating cash outflows in respect of the Company acquiring its own shares (USD 13.9m), the Company's dividend (USD 3.6m), and USD 15.2m in respect of the non-recurring settlement of deferred contingent consideration. But the balance sheet remains solid with Leverage at 1.0x pro forma EBITDA as of 31 December 2022. Valuation is very attractive with forward PE ratio at 7.5x in the top decile for the Software & IT Services. The share price lacks some medium term momentum, but otherwise looks to be well worth owning. BUY...

...from WealthOracle

[mwj1959] 14/8/2023 12:25

The stock has also had a decent rally from 110p to 130p over the past couple of months, so there may be some profit taking

[adamb1978] 14/8/2023 11:54

Hi Boadicea

Yes, tough market for anything to be valued properly. Small caps are suffering from the interest rate environment - the upside for potential returns is less exciting for some investors comapred to a high risk free return from a bank account. If we can get another month or two of decent inflation data (starting this Wed), we should see more of a turn in market expectations for rates, whch will then help small-caps. Inflation is 7.9% and expected to fall to 7.4% on Wed...there's then the Sept data before a 2% month-on-month figure falls out of the data in October.

I do think small-caps have bottomed. Just need to focus on being in the right ones and on operational performance, and then hopefully valuations will be better later this year or going into 2024

Adam

[boadicea] 14/8/2023 11:02

Presumably nobody has any spare cash or they're not listening!
However, most of the market is down this morning, only two notable risers in my list out of about 50 (VLX and CYAN). Good news is more often taken as an opportunity to sell so perhaps only the odd penny down is an achievement of sorts when the results merely confirmed the brilliant performance that was expected!

[adamb1978] 14/8/2023 08:38

Very nice set of figures as others have said.

I was a bit worried coming into the resulst that the macro environment might not have enabled them to grow in Q2 but gross revenue has gone from 195m to 202m in the quarter.

Very impressed by the cost control, taking opex down from $25m to $22m from Q2 to Q1. Given this sector will never be high margin at an operating level, this cost reduction has a big impact.

Shares look very cheap as others have said given the cash generation. Doubling of the share price from here wouldnt be unreasonable

[deanowls] 14/8/2023 08:01

Another two years of payout for VGL then we should see a large bump in cash flow.

[davebowler] 14/8/2023 07:58

Zeus-
H1: Returning value to shareholders

The company grew EBITDA strongly and expanded Adjusted EBITDA/ Gross profit margin through operating leverage. Cash generation was solid and is expected to improve in H2 2023. The company is using its rising cash balance to buy back shares and return cash to shareholders. We forecast average adjusted share count falls by 9% and Adjusted EPS rises by 18% in 2024. This strong performance is not factored into the shares’ forward metrics of 5x EV/ Adj EBITDA, 7x Adj PE and 15% FCFF yield in 2024, in our view.

H1 results: The company delivered 16% yoy growth in Adjusted EBITDA to $44.6m, driven by high operating leverage. Whilst gross revenue grew 18% yoy in H1 2023 (pro forma: 14%), Adjusted expenses reduced through the period from $24.5m in Q1 2023 to $22.1m in Q2 2023 due to vendor rationalisation and efficiency initiatives. As a result, Adjusted EBITDA/ Gross profit margin rose to 48.9% in H1 2023 from 47.0% in H1 2022. We expect expense management and the benefit of operating leverage to continue throughout H2 2023.

Net debt rose to $68.2m from $56.6m at the end of 2022, resulting in Net debt/ Adj EBITDA rising to 1.0x from 0.9x at the end of 2022. Net debt would have fallen by $20.8m if we exclude the impact of share buybacks ($13.6m), dividends ($3.6m) and deferred consideration payments ($15.2m). Cash generation was lower in H1 2023 due to increased investment in growth and bonus accruals. Adjusted operating cash conversion was 94%, down from 110% in 2022. The company expects cash conversion to normalise to nearly 100% for the remainder of the year.

Outlook and estimates: The company expects to trade at least in line with current market expectations for the full year. We conservatively keep our 2023 estimates unchanged and forecast 7% Adj EBITDA growth in 2023. Our forecasts assume H2 revenue grows 8% over H1 2023, whilst H2 on H1 revenue growth was 14% in 2022. We expect the company to continue benefiting from operating leverage with Adjusted expenses down modestly in H2 from H1. We forecast 6% sequential growth in Adjusted EBITDA in H2.

Importantly, CentralNic is aggressively buying back shares and accelerating Adjusted EPS growth, whilst introducing a dividend. In H1 2023, the company bought back 5.7m shares and the EBT purchased about 4m shares at a total cost of $13.6m (£10.7m). The company’s repurchased shares have not yet been cancelled and remain part of CentralNic’s share count. Furthermore, the company expanded its second share buyback programme by £30m to £34m on 3 July 2023 and CentralNic had remaining authority for £27m of buybacks at the end of H1 2023. Assuming a repurchase price of 131p, the remaining authority represents 20.6m shares or 7.4% of current share count. We expect the full impact of this year’s share buybacks to show through in 2024, where we forecast Adjusted weighted average share count falls by 9% and Adjusted EPS rises by 18% (to 21.3p) and net debt to EBITDA falls to 0.2x from 0.8x at the end of 2023.

Valuation: We believe CentralNic’s strong Adjusted EBITDA growth, high cash conversion and strategies to return value to shareholders are not reflected in current valuation multiples. Shares trade at only 5x EV/ EBITDA, 7x PE and 15% FCFF yield 2024, whilst the company has delivered a strong H1 and potentially higher future returns.

[rivaldo] 14/8/2023 06:44

From Zeus Capital this morning - Adjusted EBITDA/ Gross profit margin actually rose to 48.9% in H1 2023 from 47.0% in H1 2022. And organic revenue growth is "only" 31% :o))