Gamma maintains margin but lacks momentum

Gamma Communications (GAMA), the provider of communications services such as phone and data systems, did well in the first six months of the year.

Its UK indirect business, which mainly serves smaller customers through resellers and makes up around 60 per cent of turnover, grew sales by 10 per cent. The company had been expecting an improvement in demand once Covid-19 restrictions eased and so it proved. Its UK direct arm, which works with bigger organisations, also grew sales by 7 per cent as it secured more work installing Microsoft’s Teams systems across organisations including the Home Office and the Department for Work and Pensions.

Gross margins remained largely flat, though, as more of its work involved hardware sales and system installations, which are not as profitable as other lines. It also reported salary inflation, which it said will not “materially impact” results this year but could act as a short-term brake on earnings.

Like all technology businesses, particularly those offering cloud-based services, expectations around future earnings have tempered – its shares have halved in value over the past 12 months. This means it trades at a far less demanding level of less than 15-times FactSet consensus earnings, compared with a five-year average of 26-times.

Although the company said businesses have historically continued to spend on communications during recessions, the difficult economic climate – particularly for SMEs – means it is difficult to identify short-term growth catalysts. Peel Hunt expects double-digit earnings growth of nearly 11 per cent to 71p this year but thinks this number will fall back again next year to 68.7p. Although its forecast is at the lower end of consensus, there isn't enough of a clear incentive for us to change our hold view.

Last IC View: Hold, 1336p, 22 Mar 2022