Gamma Communications is progressing steadily but not dramatically

  • Dividend increased by 13%
  • Adjusted profit increased by a quarter

Gamma-Communications (GAMA) provides cloud communication services to small businesses. It works with partners like Three or Microsoft and creates software solutions to integrate these products into customers’ businesses.

The advantage of this model is that there are network effects. For example, Gamma has been added to Microsoft’s exclusive vendor lists and Microsoft Teams has now been integrated into the Horizon Cloud PBX service. If a customer wants Teams in their communications solution, Gamma is one of the few places they can go. It’s a good gap.

Last year, revenues increased by 14%. The UK, which accounts for 84% of total revenue, increased by 9%, while European activity increased by 50%. However, recurring revenue fell two percentage points to 89%. Although not perfect, this figure is still acceptable and the drop is due to the acquisition of HFO in Germany which has a mobile subsidiary which generates recurring revenues.

Reported profit before tax fell 10% as last year’s figures included profit from the £19.5million sale of The Loop last year. Excluding the sale, underlying profit rose 25% to £77.2m.

Broker Investec was pleased to see gross margins holding steady at 51% despite “third-party comments regarding pricing pressures”. However, prices may need to keep rising if wage inflation kicks in next year, especially since the majority of Gamma’s costs are people-related. Investec isn’t expecting exceptional earnings growth, however – with 2023 EPS expected to be only a little higher at 65.8p, giving a pricey 2023 PE ratio of 23. Hold on.

IC Last Seen: Buy, 2,205p, Sep 7, 2021

ORDER PRICE: 1336p MARKET VALUE: £1.29 billion
TO TOUCH: 1336-1338p TOP OF 12 MONTHS: 2350p LOW: 1293p
NET ASSET VALUE: 269p* NET CASH : £38 million
Year at December 31 Turnover (£million) Profit before tax (millions of pounds sterling) Earnings per share (p) Dividend per share (p)
2017 242 25.6 24.5
2018 285 34.5 30.3 9.3
2019 329 45.2 36.6 10.5
2020 394 75.0 67.5 11.7
2021 448 67.2 55.9 13.2
% change +14 -9 -17 +13
Ex div: June 02
Payment: June 23
*Includes intangible assets of £129 million or 134 pence per share

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