Join our community of smart investors

Gamma driven by cloud computing

The business communications group reported double-digit growth in revenue, profits and earnings in 2017
March 22, 2018

The transition from traditional fixed-line office communications to advanced cloud and mobile products has happened faster than management at Gamma Communications (GAMA) anticipated. But even though margins in the group’s traditional business contracted through 2017, over the long haul the market shift is a good thing. That's because Gamma has positioned itself to benefit from the digital transition: installations of its SIP Trunking and Cloud PBX products were up 33 and 44 per cent, respectively, last year.

IC TIP: Hold at 730p

Although these products now contribute the majority of revenue in both the direct and indirect sales divisions, top-line growth across both channels was encouraging. The new products also carry significantly higher margins than Gamma’s traditional products, so gross margins rose to 48 per cent in the indirect division (76 per cent of revenue), and 47 per cent in direct – with gross profit increasing by 14 per cent to £113m as a result.

Complying with the demands of the modern office is a costly business, meaning capital expenditure of £24.7m was £5.1m higher than in 2016. But improving fibre capabilities, increasing capacity and expanding the product range are investments worth making. Little wonder, then, that Investec thinks the group’s strengthening market position will help drive pre-tax profit and EPS up to £30.6m and 26.6p in 2018 (from £27.8m and 24.7p in 2017).

GAMMA COMMUNICATIONS (GAMA) 
ORD PRICE:730pMARKET VALUE:£681m
TOUCH:730-754p12-MONTH HIGH:776pLOW: 470p
DIVIDEND YIELD:1.2%PE RATIO:30
NET ASSET VALUE:106pNET CASH:£31.6m
Year to 31 DecTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201314911.510.5nil
201417311.510.64.0
201519222.620.46.6
201621421.619.47.5
201723826.424.48.4
% change+12+22+26+12
Ex-div:31 May