This report is an updated version of the report published on 27 May 2022 at 07:59 AM GMT+1.

Gamma Communications PLC

Gamma Communications PLC (LON: GAMA) is an FTSE AIM UK 50 listed telecommunications company, engaged in providing voice, connectivity, and mobile services.

The company is expected to provide its next trading update on 06 September 2022.

Investment Rationale for Valuation – Speculative Buy at GBX 1,172.00

• Trading Update: As per an update on 19 May 2022, the Group reported growth in the initial part of 2022 and expects the positive momentum to continue for the rest of the year. It also stated that the growth in gross profit in the Indirect Business for 2022 is expected to be on the same lines as the prior year i.e., 8% y-o-y growth.
• Revenue Visibility: The company has stated that new project wins for the UK direct business will deliver growth in H2FY22, and anticipates revenue to grow by 10% in FY22 from FY21.
• Comfortable Balance Sheet: The balance sheet position remains strong driven by underlying trading conditions to generate cash for the business. It ended the period with a net cash position of £54.0 million as of 30 April 2022.
• Dividend: The management has declared an FY21 final dividend of 8.8 pence, compared to 7.8 pence declared in the prior corresponding period. The payment date has been recorded as 23 June 2022.

Key Risks

• COVID-19 Headwinds: The telecommunications space in a few markets has been impacted by the COVID-19 pandemic, resulting in lower levels of cloud growth.     
• Macro Risk: The company is faced with the risk of a business downturn owing to rising costs for companies on the back of record inflation levels, coupled with a hike in interest rates.

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

(Source: Company Website)

• Revenue: The company’s revenues grew by 14% to £447.7 million in FY21, compared to £393.8 million in FY20.   
• Cash Flow from Operations: Cash generated by operations grew by an impressive 28% to £89.8 million in FY21, compared to £70.3 million in FY20.

One Year Share Price Chart

(Source: REFINITIV; Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY22E)

*Peers: Few peers considered are Informa PLC, Immediate Acquisition PLC and Team17 Group PLC.  

*All selected peers are LSE-listed Companies from the Communication Services sector.  

Conclusion

The company remains upbeat about its long-term prospects, driven by its technology-led product portfolio and coupled with multiple customer bases. It expects adjusted EBITDA and adjusted EPS for the year ending 31 December 2022 to be in the upper half of the range of market forecasts, which reflects at Adjusted EBITDA £101.0m - £106.8m and Adjusted EPS 66.6 pence - 74.6 pence.

Based on the decent start to FY22, business wins, positive outlook and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Gamma Communications PLC at the closing market price of GBX 1,172.00 (as on 26 May 2022) with lower double-digit upside potential based on 19.39x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

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.

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

Note 2: Investment decision should be made depending on the investors’ appetite on 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 subject to the factors discussed above.

Note 3: Dividend Yield may vary as per the stock price movement.

Note 4: Target Price refers to a price level which 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 5: ‘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.’

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 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 unfavorable movement in the stock prices.

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