‘Out-competing both large and small rivals for years, this is a telecoms technology rarity growing at a pace that is far out-stripping its peer group.’
This was what Shares wrote about Gamma Communications (GAMA:AIM) back in 2018 when the shares were trading at 518p. It’s been a consistent favourite of ours over the years and we have pitched it as a Great Idea a couple of times since, making money for willing buyers each time.
Today, the price is more than three-times that level, yet they remain at a comparable valuation, a 12-months forward PE (price to earnings ratio) 17.8 versus 17.3, clearly illustrating how EPS (earnings per share) have rapidly grown over the years, from 30p in 2018 to 67.2p in 2023. Analysts are forecasting 84.5p for 2024 (to 31 December) and 91.9p in 2025.
WHAT DOES GAMMA DO
With a track record for under-promising and over-delivering, we see Gamma as a unique business in the integrated IT and communications space using cloud technology. Already enjoying a strong growth trend, the pandemic hastened most organisations in their shift to embrace cloud flexibility and cost efficiency, yet Gamma has a habit of out-competing both large and small rivals in what is increasingly known as the unified communications-as-a-service industry, or UCaaS for short.
There was a slowdown in the post-pandemic pace of growth, as that demand spike regressed to the mean, but Gamma already has significant scale with a strong track record for developing in-house communications solutions. We expect the company to continue expanding its product and service offering and building out its Eurozone footprint, creating an increasingly compelling value and service-based proposition.
Traditionally UK-only, Gamma has expanded into markets in Spain, Holland, and Germany over the past few years through sensibly priced acquisitions. Returns on capital run at around 18%, implying that the company spends its money wisely.
The shares hit a 12-month high of £17.20 in the weeks following first-half results in September.
Revenue and operating profit rose by double digits, helped by positive underlying growth and a solid contribution from acquisitions, and the firm raised its guidance for full-year profit and EPS to the top of the range of analysts’ estimates.
‘Gamma has achieved another strong set of results, marked by robust revenue growth, stable margins, and strong cash generation,’ said chief executive Andrew Belshaw at the time.
WHY INVEST NOW?
Currently valued by the market at £1.55 billion on AIM, Gamma would go straight into the top half of the FTSE 250 Index if it was a main market company, and investors can look forward to a promotion in 2025.
The company has held talks with its largest shareholders and Gamma is eyeing an equity shares (commercial companies) listing category on the Main Market, paving the way for FTSE 250 membership and share buying by FTSE 250 trackers and ETFs, which should provide solid support for the stock.
‘The company is in the process of appointing advisers and subject to FCA approval, expects to move to the Main Market in mid-2025,’ Gamma said in September.
Being on London’s Main market will help improve trading liquidity and further enhance Gamma’s reputation and market penetration as Gamma continues to grow in different jurisdictions. More news could come as early as January 2025.
It would also allow Gamma to tap a far deeper pool of investment capital should it need it. Over the past five years, Gamma has thrown off more than £292 million of free cash flow on £255 million net profit, allocating just £91 million to capital expenditure.
This tells us that if the company continues to pursue relatively small bolt-on acquisitions it shouldn’t need extra funding, but it will have the option to tap investors in its back pocket should particularly attractive opportunities emerge.
Gamma is a compelling, sensibly run investment opportunity with scope for positive surprises and investors should buy the shares.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
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