CentralNic (CNIC:AIM) 116.5p

Loss to date: 18.5%

Small cap internet expert CentralNic (CNIC:AIM) continues to stubbornly frustrate shareholders even in the face of continued rapid growth.

Since shifting focus from domain name management to online marketing services the company has produced a series of guidance hikes and rampant growth metrics that promise to catapult revenues and profits to new records this year. Yet the stock remains as ignored by the wider market as ever.

WHAT’S HAPPENED SINCE WE SAID TO BUY?

If we take Berenberg’s expected 2022 forecasts at face value, it implies that revenues will have almost tripled in two years to roughly $600 million while adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) will have gone from $29 million to $70 million.

Since November 2021, when we originally said to buy the stock, the share price has plunged 18.5%. Obviously, the market’s shift away from growth as inflation soars has hurt the investment case, yet the financial performance continues to race ahead.

In recent first-half results (30 Aug) CentralNic reported revenues up 93% to $335 million, 62% of that growth organic. This was propelled by Online Marketing, which grew 167% (98% organically) to $258 million. Its domain names business was basically flat at $76.8 million, demonstrating management’s eye for developing the business as opportunities and markets change.

WHAT SHOULD INVESTORS DO NEXT?

Presumably, the market’s reluctance to give CentralNic credit is due to its constant use of equity issues to fund acquisitions. This has capped earnings per share (EPS) growth to 57% in two years versus 141% EBITDA growth over the same timeframe. With a forecast $51 million of free cash flow anticipated this year, according to Berenberg, perhaps management needs to stop issuing new shares and start funding M&A from existing resources.

Net debt at the end of this year is estimated at $52 million, so the balance sheet is far from extended. This would surely change the market’s view of the company, reducing the stream of adjustments to earnings and delivering the re-rating the share price seemingly deserves.

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