Web Central Group (WCG) is being taken over by Melbourne IT (MLB) so I thought I might change the name of this thread.


First and foremost I recommend checking out WCG’s announcement of November 10 entitled “historical financials” where the historic performance of both FTR and WCG are set out. The numbers speak for themselves.

However, for a bit of background info…

WCG (formerly FTR) owns two companies:

(1) For The Record which provides recording devices to courtrooms, police, education providers etc. Steadily growing demand, with simple to operate devices and good distribution network in the US.

(2) Web Central Group is involved in web hosting services and related activities.

Both divisions are market leaders.

Until recently Web Central Group was called FTR Holdings – holding FTR and 49.4% of Web Central. But a couple of months ago FTR Holdings acquired all of Web Central and changed its name to, of all things, Web Central Group.

This acquisition was paid for with $7 million cash, raising $11 million of bank debt and issuing 2 million new shares and 2 million options. Consolidation of WebCentral will “provide access to its cashflows, enable leverage of the balance sheet and reduce WCG’s cost of capital.” Access to Web Central’s cashflows should also allow the commencement of a half decent dividend.

Web Central has economies of scale which are crucial in web hosting and allow it to earn fatter margins than competitors. It is one the few profitable operators in the managed internet hosting space with “an impressive roster of customers and partners”. Web Central was awarded the Microsoft Provider of the Year award (the first time ever a non-US company has been awarded this).

WCG has 38 million shares on issue and 4 million options. Trading at $1.05 WCG has a fully diluted market cap of $44 million. Last year WCG made a NPAT of $1.5m or 4.3cps, apparently putting WCG at a PE of 29. But the result for FY04 is not the relevant measure of WCG today - because it did not include the results of Web Central (which at balance date, as mentioned, was not a controlled entity) only the dividend paid by Web Central to the then FTR Holdings went to the bottom line. Now I will refer to the information released by the company on November 10. Combining FTR and all of Web Central, WCG would have earned revenue of $50.3 million in FY04 and EBITDA of $11.7 million. So it’s trading at a [u]price/EBITDA ratio of 3.8</u>.

Insiders hold 20 million shares (about half the company).

I would argue that WCG should trade at an EBITDA multiple of at least 10x (like IINet) and possibly up to 16x (like Melbourne IT). In which case, WCG should be valued at minimum $120m - $190m or between $2.80 and $4.50 a share now. EBITDA has been increasing about 50% for each of the last two years. If this momentum can continue, the shares could well be worth between $5 and $9 within 2 years (i.e. between a four and eight bagger). It could take until 1H05 or FY05 result (when WCG will most likely declare a dividend) for the market to really take notice.

Outlook
(From the Annual Report)
Shared hosting revenues in the coming year will be boosted by the recent bulk migration of several thousand customers from one wholesale partner – one of the largest migrations of hosting customers ever undertaken in Australia. Additional benefits are also expected to accrue from the broadening of the range of products being sold across existing wholesale accounts, including managed applications such as Managed Exchange.

The prospects continue to be positive for the WebCentral Complex division, with its credibility in the enterprise marketplace heightened by a number of significant contract signings and successful project implementations during the past financial year.

Conclusion
Web hosting is a competitive business, and competitive pressures could lead to EBITDA not being maintained at current levels.

But technically WCG is trending upwards and has outstanding fundamentals. These fundamen