Gamma Communications progress steady but unspectacular

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

Last year, revenue grew 14 per cent. The UK – which makes up 84 per cent of total revenue – grew 9 per cent while the European business was up 50 per cent. However, recurring revenues did drop two percentage points to 89 per cent. While not perfect the this figure is still acceptable and the fall was down to the acquisition of HFO in Germany which has a mobile subsidiary that produces one-off revenues.

Reported profit before tax fell 10 per cent because the previous year’s figures included the profit from the £19.5mn sale of The Loop last year. With the sale excluded, underlying profit was up 25 per cent to £77.2mn.

Broker Investec was happy to see gross margins remain flat at 51 per cent despite “third-party commentary around price pressures”. Prices may have to keep rising, though, if wage inflation kicks in, particularly as the majority of Gamma’s costs are people related. Investec doesn’t expect exceptional profit growth – with 2023 EPS forecast to only be a little higher at 65.8p, which gives an expensive 2023 PE ratio of 23. Hold.  

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