Gamma Communications PLC (LON: GAMA) – Delivering positive product performance and strengthening the market capabilities

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 (Unified Communications as a Service) 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)

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. 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.

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.

Industry Outlook Dynamics

As per the latest 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.

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of Gamma Communications Plc

Recent Developments

On 11 September 2020: The Company confirmed that it had approved the issue of 160,501 ordinary shares. Therefore, the number of ordinary shares in issue will increase to 95,252,34.

On 8 September 2020: GAMA announced the appointment of Charlotta Ginman and Xavier Robert as Non-Executive Directors of the Company with immediate effect.

Financial and Operational Highlights (for the six months ended 30 June 2020 (H1 FY20), as on 8 September 2020)

(Source: Company Website)

• Despite the minor impact of Covid-19, the Company delivered a strong financial performance across all business units during the first half, with positive growth across all key product categories.
• The Company’s revenue increased by 12% year-on-year (YoY) to £177.3 million, with an increase in organic revenue of 9% YoY and organic gross profit of 15% YoY.
• As per the business category, UK Indirect division continues to grow strongly with a focus on the existing partner base, and UK Direct business continues to deliver very positive growth. Therefore, UK Indirect gross profit and UK Direct gross profit surged by 15% and 25%, respectively. It also saw good growth in Overseas business (including Voz Telecom (acquired in April 2020)), with an increase in gross profit of 44% YoY.
• In the UK, the Company reported strong growth across the major product groups, with the number of installed SIP Trunks increased to 1,100,000 at 30 June 2020 (from 1,016,000 at 31 December 2019), and the number of Horizon users increased to 560,000 in H1 FY20 (from 522,000).
• On 30 June 2020, it had 65,000 Cloud PBX seats in Europe. In H1 FY20, the Company will focus on developing the roadmap for UCaaS in the UK and Europe.
• The Company reported an adjusted EBITDA of £36.1 million, which was up by 19% YoY, and the earnings per share were 22.1 pence in H1 FY20.
• During the first half, the Company acquired Exactive Holdings Ltd in February 2020 and Voz Telecom in April 2020.
• GAMA also plans to launch a streamlined digital tool to support Direct customers and Direct customer communities.
• Therefore, the Company is confident about the outlook for FY20 and expects the full-year revenue to be in the range of £369-£394.3 million.
• Also, the adjusted EBITDA and adjusted EPS are anticipated to be in the range of £72.1-£75.1 million and 43.5-49.9 pence, respectively.

Financial Ratios

Share Price Performance

On 5 January 2021 (before the market close, at 8.10 AM GMT), Gamma’s shares were trading at GBX 1,635.00, down by 1.51% against the previous day closing price. Stock 52-week High and Low were GBX 1,805.79 and GBX 910.00, respectively.

From the technical standpoint, 20-day SMA (1,579.75), and 20-day EMA (1,606.015) are currently supporting an upside potential, which means the stock price could increase in the short term.

In the last one year, GAMA’s share price has delivered ~20.96% return as compared to the ~17.30% return of FTSE AIM UK 50 index, and a negative ~19.86% return of FTSE All Share Telecommunication index, which shows that the stock has outperformed the benchmark index and the sector.

In the last two years, Gamma Communications Plc share price has delivered around 112% return as compared to approximately 34% return of FTSE AIM UK 50 index, which shows that the stock has outperformed the index during the last two years. 

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

Business Outlook Scenario

Gamma has a robust business model with strong (+90%) recurring revenue & margin; and thus, there is good visibility of outlook. Moreover, with future adoption of cloud services, there is a strong potential of UCaaS market.  As performance in H1 FY20 has continued to be strong, the Company remains optimistic about future growth prospects. Despite 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. 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 are likely to deliver growth even in the long-term.

(Source: Presentation, Company Website)

Considering the decent business performance, positive product performance, the development and launch of new products & services, decent business growth rate trajectory, robust financial position, solid liquidity profile, higher profitability margins, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Gamma Communications at the current market price of GBX 1,635.00 (as on 5 January 2021, before the market close at 8:10 AM GMT) with lower double-digit upside potential based on 37.08x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.). 

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

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

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