Gamma Communications PLC (LON: GAMA)

Founded in 2001, Gamma Communications PLC is a FTSE AIM UK 50 Index listed technology-based provider of communication services in Western Europe. It is a leading provider of Unified Communications as a Service (UCaaS) into the UK, Spanish, German, and Dutch business markets. It operates with four operating segments, namely UK Indirect, UK Direct, Overseas, and Central functions. The UK indirect sells traditional and growth products to channel partners and generate the Company’s external revenue. The UK Indirect sells products to end-users in the SMEs (small and mid-size enterprise) and public sectors. The Overseas segment provides a range of telecom and internet products, including Cloud PBX services. The Central functions segment is involved with the central management team. The Company is expanding its UCaaS presence in Europe with a focus on digital automation. It has consistently delivered revenue and EBITDA growth. It employs around 1,355 people across all its businesses.

(Source: Annual Report, Company Website)

Key Fundamental Statistics

Industry Outlook Dynamics

As per the latest (August 2020) publication of the Grand View Research, the global unified communication as a service market size is forecasted to be valued at US$169.63 billion by 2027. The market size value was US$38.74 billion in FY20, which represents a CAGR of 23.5% from 2020 to 2027. The growing usage of Cloud as a Service model across organisations, rising acceptance of Cloud-based Unified Communication solutions, lowered entry barriers in the CaaS market, and increasing deployment of artificial intelligence in the communication market shall propel the market growth.

Growth Prospects and Risk Assessment

GAMA is a leading supplier of UCaaS in the UK and Dutch markets, which provides a range of Unified Communications, Mobile and Connectivity services. It ensures secure solutions that enable clients (organisations) to communicate, collaborate and offer a better customer experience. The Company has continued focus on upselling and cross-selling across all sales channels. As a result, all business units and product categories have demonstrated robust growth over the years. In H1 FY20, both their UK and European businesses continued to develop and grow positively. It has also strengthened the geographical reach and overall product capabilities with the acquisition of Exactive Holdings Ltd, VozTelecom, HFO Holdings AG, and GnTel B.V.  Moreover, it remains committed to a progressive dividend policy, which has delivered an increase of 10-15% every year since the listing in 2014.

 (Source: Presentation, Company Website)

However, there are certain risk and uncertainties to business growth. As a provider of network infrastructure, it is exposed to cyber threat and telephony fraud, which can impact the Company’ reputation and commercial position. Moreover, the unplanned service disruption and poor customer service experience could affect the Company’s ability to sustain and grow revenue. Also, the growing competition can dilute the addressable market and put pressure over margins. Furthermore, failure to integrate the acquired business successfully can create operational problems and inefficiencies.

Key Recent Developments

• 20 July 2020: GAMA announced the acquisition of GnTel B.V. (which is Netherlands-based Cloud PBX provider). The acquisition will come under the DX Group in the Netherlands.
• 2 July 2020: The Company acquired nearly 80% stake of HFO Holding AG, with an option to acquire the remaining 20% over the next three years. It can be a strategically important transaction to strengthen the market presence in Germany.
• 9 April 2020: The Company completed the acquisition of controlling stake in VozTelecom (provider of IP telephony services in Spain), as a part of the European expansion strategy.

A Glimpse of Business Segments

The Company’s reportable segments are strategic business units that offer products and services into different markets. In FY19, 70% of sales were generated by the UK Indirect segment. The financial performance of operating segments in FY19 can be seen in the image below:

(Source: Presentation, Company Website)

Key Shareholders Statistics

Financial & Operational Performance – H1 Financial Year 2020 (30 June 2020)

(Source: Interim Report, Company Website) 

• In the first half of the financial year 2020, the Company posted strong financial performance across all business divisions and key product categories, with the minor impact of the covid-19 pandemic.
• The Company witnessed revenue growth of 12% and 9% growth in organic revenue, driven by a strong growth from UK indirect business and UK direct business.
• The Company has delivered a decent profitability growth for the period, driven by a strong performance from overseas business and overall revenue growth.
• The operating cash flow increased by 18% for the period, while the closing cash balance as on 30 June 2020 declined, due to the investment in acquisitions and spending on capital expenditure. The Company also remained consistent with its progressive dividend policy.
• GAMA continues to see strong growth in the UK, with increased installed SIP Trunks, Horizon users and made collaborations to integrate Unified Communications upgrade to Horizon. As on 30, June 2020, the Company has 65,000 Cloud PBX seats.
• In the first half of the financial year 2020, the Company made two acquisitions, Exactive Holdings Ltd in February 2020 and VozTelecom OIGAA360, S. A in April 2020. The Company also acquired HFO Holdings AG and GnTel B.V. after 30 June 2020, to expand operations in German, Spanish and Dutch markets. After acquisitions, the Company has more than 100,000 Cloud PBX seats in mainland Europe.
• The Company continues to make an investment in Digital Programme, which will improve levels of efficiency, automation and overall customer experience.

Financial Ratios

Reported net income margin for the financial year 2019 was higher against the industry median, reflecting higher revenue generated and better control over expenses as compared to the industry. On the liquidity front, GAMA has delivered a current ratio of 2.34x which was significantly higher as compared to the industry median of 0.79x, reflecting better ability of managing short-term obligations. On leverage front, the debt-equity ratio was 0.08x, which was remarkably lower as compared to the industry median of 1.23x. It indicates that the Company has less leveraged capital structure against the industry and yet, it is able to deliver better net income margin, while prudently managing the short-term obligations. 

Share Price Performance Analysis

Daily Chart as on 8 September 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On 8 September 2020 (before the market close, at 8:39 AM GMT+1), Gamma Communications Plc shares were trading at GBX 1,565.00, up by 3.64% against the previous day closing price. Stock 52-week High was GBX 1,755.00 and Low of GBX 910.00, respectively.

From the technical standpoint, shares were trading above the short-term support level of 50-day, 100-day and 200 day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further.

Gamma Communications Vs FTSE AIM UK 50 Index (5 Years)

(Source: Refinitiv, Thomson Reuters)

Over the past five years, the stock has significantly outperformed the benchmark index with a sparkling ~437.79% return while FTSE AIM UK 50 merely yielded ~35.29% of return. 

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook Scenario

The Company has a positive long-term market outlook, which is supported by significant opportunities across core growth products and key areas of strategic focus. However, the growth can be tempered by the short-term uncertainties due to the potential impact of Coronavirus.

Performance in H1 FY20 remained strong and the Company remains optimistic about future growth prospects. Despite the Covid-19 uncertainties, it has not seen any increase in bad debts. Subsequently, adjusted EBITDA and adjusted EPS are projected to be at the top end of the expected range in FY20. The full-year (FY20) revenue is expected to fall in the range of £369.0-£394.3 million.

Adjacently, adjusted EBITDA and adjusted EPS are anticipated to be in between £72.1-£75.1 million and 43.5-49.9 pence, respectively. Overall, it has a robust business model with visibility of over 90% recurring revenue and margin, to ensure growth in FY20. As a predominantly channel-focused business, the Company intends to continue the investment in strengthening the relationships with suppliers and enhance capabilities to support the channel growth. It also plans to drive increased levels of digitalisation and automation across UK Direct business. Moreover, the execution of 2023 strategic priorities is likely to deliver growth even in the long-term.

 (Source: Presentation, Company Website)

Over the course of 4 years (FY15 – FY19), the company’s revenue surged from GBP 191.80 million in FY15 to GBP 328.90 million in FY19. Compounded annual growth rate (CAGR) stood at 14.43 per cent.

Considering the strong financial performance, increased demand for key product categories, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Gamma Communications Plc at the current price of GBX 1,565.00 (as on 8 September 2020, before the market close at 8:39 AM GMT+1), with lower-double digit upside potential based on 35.89x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.).  

*Dividend Yield may vary as per the stock price movement.

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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