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 in 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 expects to release its next trading update on 06 September 2022.

Recent trend of dividend payments

GAMA has a progressive dividend policy and shown a robust increase at a CAGR ranging from 10% to 15% since its IPO in 2014. The Company will pay a final dividend of 8.8 pence per share on 23 June 2022, while the ex-dividend date was 01 June 2022. It takes the total FY21 dividend to 13.2 pence per share, an increase of around 12.8% from 11.7 pence per share paid during FY20.

(Source: LSE, chart created by Kalkine Group)

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.

Key Risks 

• Record US Inflation: The red-hot inflation data released on 10 June 2022 had raised fears of aggressive Federal Reserve monetary tightening.
• Bank of England Meeting: The Bank of England meeting scheduled for 16 June 2022 may continue the cycle of rate hikes. Thus, it may adversely impact the UK equities.
• Weak UK GDP Numbers: According to the Office for National Statistics, the UK GDP grew only 0.2% for the three months through April 2022 after 0.8% in the previous three-month period.

Key Fundamental and Shareholders Statistics of Gamma Communications PLC.

BlackRock Investment Management (UK) Ltd. is the most significant shareholder as it holds nearly 10.94 million shares.

Financial Highlights (for the year ended 31 December 2021, as of 22 March 2022)

(Source: Company Filings)

• Uptick in Gross Profit: The Group reported gross profit of £228.5 million in FY21, compared to £200.8 million in FY20.
• Operating Cash Flow: The Company reported an increase of over 28% in cash delivered from operations to £89.8 million in FY21, compared to FY20.
• Revenue: The Company’s revenues grew by 14% to £447.7 million in FY21, compared to £393.8 million in FY20.

Share Price Performance Analysis

(Source: Refinitiv, Research done by Kalkine Group)

On 14 June 2022 at 09:20 AM GMT+1, GAMA’s shares were trading at GBX 1,144.00, down by around 1.55% against the previous day closing price. Stock 52-week High and Low were GBX 2,350.50 and GBX 1,070.00, respectively.

On a daily chart, the stock price is hovering below the lower Bollinger band, indicating an upside potential in the stock price. Also, the 14-days RSI of ~37.25 approaches oversold territory.

Valuation Methodology: Price/Earnings Approach (FY22E) (Illustrative)

Business Outlook

The new project wins for the UK Direct business will drive growth of GAMA during the second half of FY22. Moreover, the Company has shown growth across three operating segments during H1 FY22 and is expected to carry this positive momentum throughout the remainder of FY22. In addition, the Company maintained an optimistic long-term market outlook, with the future adoption of cloud services forecast to grow across all markets. The strong financial position has enabled GAMA to raise investments in products and market development. Overall, GAMA aimed to generate long-term returns for the shareholders with an exciting portfolio and roadmap of new product launches and capabilities.

Please note markets are trading in a highly volatile zone currently due to certain macro-economic and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

Considering the robust top-line business growth, strong profitability, new launches, consistent dividend payments, 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 market price of GBX 1,144.00 (as of 14 June 2022 at 09:20 AM GMT+1), with lower-double digit upside potential based on 19.36x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and is subject to the factors discussed above.

Note 3: Target Price refers to a price level that the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios.

Note 4:  Kalkine reports are prepared based on the stock prices captured either from the London Stock Exchange (LSE) and or REFINITIV. Typically, both sources (LSE and or REFINITIV) may reflect stock prices with a delay which could be a lag of 15-20 minutes. There can be no assurance that future results or events will be consistent with the information provided in the report. The information is subject to change without any prior notice.

Note 5: Dividend Yield may vary as per the stock price movement.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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