Gamma Communications PLC (LON: GAMA) 

Gamma Communications PLC is an 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 (Upas) 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 Company was founded in 2001, and presently, it employs around 1,355 people across all the businesses.

Recent trend of dividend payments

GAMA had a progressive dividend policy and showed a robust increase at a CAGR ranging from 10% to 15% since its IPO in 2014. The Company had paid an interim dividend of 4.4 pence per share on 21 October 2021, while the ex-dividend date was 23 September 2021. The interim dividend growth remained around 13% for H1 FY21 as compared to the prior-year levels.

Growth Prospects

• Cloud Adoption: The increasing levels of cloud adoption across all markets and business segments have raised the revenue visibility for the medium term.
• Long-term Strategic Priorities: GAMA is seeking a strong cloud telephony position in the UCaaS market by 2023. Furthermore, the Company would continue to enhance digital capabilities to assure agility and sustain competitiveness.
• Impressive M&A Activities: The Company had acquired Mission Labs for an initial consideration of around £40.8 million. Moreover, with this acquisition, the Company will take advantage of structural changes in the market, which leads to greater adoption of cloud services.
• Launch of Key Products: GAMA had launched several key products like PhoneLine+, Horizon Contact, and SoGEA Broadband, which would make healthy contributions to the top-line business. Meanwhile, the Company had also launched a Webex video calling and conferencing service in the Netherlands during the period.

Key Risks

• Decline in Cash Balance: The Company’s cash & cash equivalents got declined by 34% during H1 FY21 when compared with H1 FY20 levels.
• Poor Customer Service: The unplanned service disruption and poor customer service experience could affect the Company’s ability to sustain and grow revenue.
• Wrong Strategic Choices: The failure of partner relationships could adversely impact the business in the near term.
• Rise in Interest Rates: The recent hawkish comments made by several central governments regarding a hike in the interest rates could make fundraising difficult for the Company.

Now, we will analyse the Key Fundamental Statistics & Shareholding Pattern of Gamma Communications PLC.  

Liontrust Investment Partners LLP is the most significant shareholder as it holds nearly 9.46 million shares as of 30 September 2021. 

H1 FY21 Financial & Operational Highlights (for six months ended 30 June 2021, as of 07 September 2021)

 (Source: Company result)

• Robust Increase in Revenue: The Group’s revenue grew by around 23% from £177.3 million during H1 FY20 to £217.4 million for H1 FY21. Moreover, the UK division revenue rose by approximately 9% during H1 FY21.
• Increase in Gross Profit: Driven by the UK Indirect business, the gross profit witnessed a marginal increase from £64.5 million in H1 FY20 to £69.2 million for H1 FY21.
• Strong European Business: The strong inorganic growth from the acquisitions in Spain and Germany drove European revenue higher from £10.6 million for H1 FY20 to £35.4 million during H1 FY21.

Financial Ratios (H1 FY21)

Share Price Performance Analysis

 (Source: Refinitiv, Research done by Kalkine Group)

On 26 October 2021, at 09:58 AM GMT+1, GAMA’s shares were trading at GBX 1,827.45, down by around 0.03% from the previous day closing price. Stock 52-week High and Low were 2,350.00 and GBX 1,425.00, respectively.

From a technical perspective, the MACD line remained above the signal line, indicating an upside potential in the stock price.

Over the last two years period, GAMA’s stock price has delivered a positive return of ~61.01%, and it has outperformed the FTSE All-Share Telecommunications Service Providers index (benchmark sector) with a return of negative 22.63% and FTSE AIM UK 50 index (benchmark index) with a return of approximately 32.62%.

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

Peers used in the valuation methodology (Price/NTM Earnings)

Business Outlook

The sales activity had returned to a normal pace and witnessed a robust revenue growth for H1 FY21. GAMA had anticipated total FY21 revenue ranging from £446.8 million to £460.0 million, while adjusted EBITDA to fall in the upper range of between £90.5 million and £95.0 million. Nonetheless, the Company had a robust business model having more than around 89% recurring revenue during H1 FY21 and strong revenue visibility for the remainder of 2021. In addition, the Company maintained an optimistic long-term market outlook, with the future adoption of cloud services forecast to grow across all markets. However, considering the rising inflation worldwide and increasing bond yields, the stock price may undergo adverse volatile movements. Overall, GAMA aimed to generate long term returns for the shareholders with an exciting portfolio and roadmap of new product launches and capabilities.

Considering the solid interim dividend growth, robust top-line business growth, strong profitability, new launches, 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 1,827.45 (as on 26 October 2021 at 09:58 AM GMT+1), with lower-double digit upside potential based on 29.96x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.). 

*The reference data in this report has been partly sourced from REFINITIV.

*All forecasted figures and Peer information have been taken from REFINITIV.

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

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

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