Gamma Communications PLC

Gamma Communications PLC (LON: GAMA) is an FTSE AIM UK 50 index listed provider of Unified Communications as a Service (UCaaS) to the business markets in the UK, Spain, Germany, and the Netherlands.

The final dividend of 8.8 pence per share is subject to approval at the forthcoming AGM, while the shares will go ex-dividend on 1 June 2022.

Rationale for Valuation – SPECULATIVE BUY at GBX 1,340.00

• Financial Growth: During FY21, there was over 14%, 21%, and 13% YoY growth in revenue, adjusted EBITDA, and total dividend per share, respectively.
• Acquisitions Benefits: On 3 March 2022, GAMA acquired Mission Labs, for an initial consideration of £40.8 million (with up to an additional £6.0 million contingent deferred consideration payable over the next three years). This transaction would strengthen the development capabilities to produce the next generation of UCaaS products.
• Positive Outlook: The Board appeared optimistic for the outlook in FY22 and beyond, as more businesses are seeking the advantage of cloud communications amid a rapid shift to a digitally enabled working environment. Therefore, the demand for UCaaS products is likely to surge across all markets.
• Technical Indicator: From a technical standpoint, 14-day RSI (~37.11) is in the oversold territory, while the stock price is hovering close to the lower standard deviation of the Bollinger Bands.
• Undervalued Multiples: On a forward 12-month basis – EV/Sales, EV/EBITDA, Price/Cash Flow, and Price/Book valuation multiples are undervalued against the average of the Telecommunications Services sector.

Key Risks

• Record UK Inflation: British inflation hit a 30-year high of around 6.2% during February 2022, which may cause a further interest rate hike. Moreover, the ongoing geopolitical tension in Ukraine and Russia can exacerbate inflation concerns.
• Gloomy Outlook: The year 2022 is expected to be the year of inflation, Central Bank tightening, and wage pressure. All these factors can hurt the corporate profits and equity markets.

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

 (Source: Company Website)

• Top-line Growth: During FY21, revenue jumped over 14% year-on-year, as it recorded growth across key product categories.
• Strong Balance Sheet: It ended FY21 with a net cash position of £49.5 million, reflecting a 3% year-on-year jump.

One Year Share Price Chart

 (Source: Refinitiv, Analysis conducted by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY22) (Illustrative)

*Peers: Telecom Plus PLC, Gaming Realms PLC, Auto Trader Group PLC, and Team17 Group PLC.

*All peers are LSE-listed Companies from the Telecommunication sector.

Conclusion 

GAMA continued to actively appraise acquisition opportunities to bolster technology, people, and product capabilities across the business. Moreover, it has strengthened its footprints in Western Europe and looked optimistic regarding the long-term prospects.

Based on the financial growth, positive outlook, strengthened capabilities, 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 1,340.00 (as of 23 March 2022), with lower double-digit upside potential based on 22.79x 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 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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