Gamma Communications PLC (LON: GAMA) – FY20 adjusted EPS and adjusted EBITDA anticipated to be slightly ahead of market expectations.

Gamma Communications PLC is a FTSE AIM UK 50 Index quoted 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 divisions, 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 was founded in 2001, and presently, it employs around 1,355 people across all its businesses.

On 23 March 2021, Gamma expects to announce FY20 results for the year ended 31 December 2020.

(Source: Presentation, 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. 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. Furthermore, the Company did not seek any government support despite Covid-19 uncertainties, and it was able to finish FY20 with a cash balance better than the market expectations.

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 on margins. Furthermore, failure to integrate the acquired business successfully can create operational problems and inefficiencies.

Industry Outlook Dynamics

As per the recent 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 the 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.

A Glimpse of Business Segments

(Source: Company Website, chart created by Kalkine Group)

Trading Update (for the year ended 31 December 2020, as on 11 January 2021)

• The Company reported that the financial performance was significantly ahead of last year, with continued strong demand in UCaaS products, mainly in the European and UK business markets.
• In FY20, the adjusted EBITDA and adjusted EPS are expected to be marginally ahead of the range of market forecasts. In contrast, the Company expects revenue to be towards the top of the range of anticipations.
• 2020 closing gross cash balance was £54.1 million, an increase from the previous year (2019: £53.9 million) and above the market expectations. Moreover, the net cash stood at £48.4 million, with a small amount of debt.
• At the end of 2020, the Company had sold its “The Loop business” for an undisclosed sum.
• During the year, Gamma Communication has spent £48 million on acquisitions.
• Despite the Covid-19 pandemic, it has maintained its dividend policy and paid dividends of £10.4 million in 2020 to shareholders.
• In 2020, the Company highlighted that its recurring revenue model has been robust, with bad debt remained at the low levels and acquired Exactive in the UK and GnTel in the Netherlands.
• During the first half of 2021, Gamma expects to launch its Cloud Contact Centre as a Service ("CCaaS") solution and target the SME market.

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

(Source: Company Website)

• 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, the UK Indirect division continues to grow strongly with a focus on the existing partner base, and the 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.
• 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.
• On 30 June 2020, it had 65,000 Cloud PBX seats in Europe. Moreover, the Company developed the roadmap for UCaaS in the UK and Europe.
• 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).
• Overall, Gamma delivered a strong financial performance across all business units during the first half, with positive growth across all key product categories.

Financial Ratios

Share Price Performance Analysis

On 2 March 2021, at the time of writing (before the market close, at 8:09 AM GMT), Gamma’s shares were trading at GBX 1,528.18, down by 1.40% 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, 14-day RSI (43.23), 200-day SMA (1,548.33), and 200-day EMA (1,533.63) are supporting the upside potential.  

In the last two years, Gamma’s stock price has remained resilient with a positive return of ~86.75%; it has significantly outperformed the FTSE All-Share Telecommunication and FTSE AIM UK 50 index with a return of nearly -16.87% and +27.15%, respectively.

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

Business Outlook Scenario

Gamma is optimistic about the long-term outlook as it has been witnessing significant opportunities across key areas. However, the growth can be tempered by short-term uncertainties due to the potential impact of Coronavirus. 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 our UK Direct business. Also, the closing cash balance at the end of FY20 was above market expectations, while the Company has maintained its dividend policy despite the Covid-19 uncertainties. Moreover, the execution of 2023 strategic priorities is likely to deliver growth even in the long-term.

(Source: Presentation, Company Website)

Considering the business expansion into Spain and Germany, execution of the UCaaS product strategy is progressing well, decent business & product performance, the development and launch of new products & services, 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 1,528.18 (as on 2 March 2021, before the market close at 8:09 AM GMT) with lower double-digit upside potential based on 33.38x Price/NTM Earnings (approx.) on FY21E 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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