Gamma Communications' unique growth opportunity

In 2025, BT (BT) will switch off the public switched telephone network (PSTN). Rather than having a copper wire landline, households and companies will have to communicate over the internet cables. Gamma Communications (GAMA) sees this as a big opportunity, hoping when small businesses are forced to switch, they choose Gamma’s cloud-enabled communication product.

As of today, BT is stopping taking on new PSTN customers. Gamma chief executive Andrew Belshaw told Investors' Chronicle there are around 3mn small businesses in the UK that are currently using PSTN and the hope is Gamma can take at least 10 per cent of them. Broker Numis agrees, calling it a “big extra profit opportunity”.

These 300k customers Gamma is targeting are most likely to switch to the basic Phone Line+ service. To put it in perspective, it currently has 8k users. This figure is more than double last year, but dwarfed by the potential market that is about to open up.

The service has made a good start, but it is only a start. And in the last six months, Gamma's actual growth has been more modest. Revenue, gross profit and operating profit were all up 9 per cent. With software companies the expectation is operating profit will grow faster as economies of scale kick in. Gamma said the increased wages have undermined that theory this year but it expects margin expansion to return.  

Broker Numis expects EPS to increase to 98p in 2025, giving an affordable looking 2025 price/earnings ratio of just 11. Given cash conversion was over 100 per cent this half, that looks like a good opportunity. Throw in the potential PSTN growth story, and there is value here. We stick to buy.

Last IC View: Buy, 1,116p, 21 Mar 2023