Financial delivery while executing strategy
FY 2019 was, as expected, a strong year for Gamma in financial terms with growth in Adjusted EBITDA of 31% a touch higher than we were expecting. Notably, that was achieved in a period where management has been pursuing its updated strategy which included investing in future growth and spending time assessing and undertaking acquisitions. The Group delivered well on its strategic aims during the year and it has announced further acquisitions in 2020. Gamma retains a strong balance sheet and we expect to see more deals in the future. It saw strong growth in the UK while its Dutch businesses were integrated and DX Groep saw a pick-up in H2. The near term business outlook is somewhat overshadowed by Covid-19 and we exercise a degree of conservatism as we upgrade our estimates to reflect the FY 2019 performance and the recent acquisitions. Nonetheless, the combination of organic and acquired growth produces a 5% upgrade in Adj. EBITDA for the current year which anticipates 15% growth on FY 2019’s strong number.
17 Mar 20
Exactive deal expands relationship with Microsoft
The acquisition of Exactive builds on last year’s purchase of Telsis, as Gamma seeks to become the leading provider of Unified Communications as a Service (UCaaS) in Europe. Exactive is one of a small number of Microsoft Teams Voice Partners operating in the UK. Having previously worked on joint projects with Exactive, Gamma will now own the ability to offer a complete range of services for Microsoft Teams – an area which could prove to be a good source of future revenues. Paying 11.3x EBITDA historical EBITDA, the deal is immediately earnings enhancing. That multiple could fall to 5x targeted 2021 EBITDA if the full contingent consideration is earned. Adding Enterprise sector focused IP and building Gamma’s relationship and accreditation with Microsoft, we see the deal as a useful addition which will enhance the Group’s UCaaS credentials. We make no changes to estimates ahead of the upcoming results and will review our assumptions on organic and acquired growth at that stage.
02 Mar 20
Strategic deal to tap significant potential
Gamma has made an offer to acquire VozTelecom (currently trading on the Mercado Alternativo Bursátil), one of the leading Cloud PBX providers in Spain, for an implied enterprise value of around €30.5 million (£25.3 million). In our view, the deal represents further progress in delivering on the Group’s strategy of expanding its footprint in Western Europe through an acquisition in another of its previously-identified target markets. Spain has a sizeable PBX market with a low level of cloud penetration and provides Gamma with the opportunity to invest in accelerating VozTelecom’s growth in an attractive market. The price implies an EV/EBITDA multiple of 12.2x VozTelecom’s pro forma (including recent M&A) 2019 EBITDA compared to our respective estimate of 19.3x for Gamma. Gamma’s net cash position stood at £53.8 million at the end of 2019 and the deal will be financed from that cash resource. We leave estimates unchanged ahead of Gamma’s upcoming full-year results and note that the acquisition will progress as a takeover offer under the relevant Spanish legislation.
19 Feb 20
Taking Stock: tumbleweed on Threadneedle Street
Good morning. With Friday’s (31 January) Brexit, the UK said farewell to the uncertainties that dogged the market in 2019. 2019 was the weakest IPO market in a decade, with the LSE’s 36 listings making it the quietest year since 2009. Now, investors tell us that there is a paucity of new ideas - with take-outs like Sophos and StatPro, there is money to recycle and they are concerned about a declining pool of listed securities. The most important determinant of a successful IPO is finding buyers for new shares, so this is positive news. At the same time, this is a golden age for technology and the entrepreneur and the UK is the best place in the world to set up and build a tech company, in our view. London is the leading city for unicorns, producing 46 unicorns since 1990; Manchester, Oxford, Cambridge, Edinburgh and Bristol have a combined total of 20. However, Capital Markets has a strong competitor – we note that in 2019, venture funding into the UK was £10bn, +40% Y/Y, and it accounted for 33% of all European Tech investment. We believe that the climate for IPOs will improve from here on in as more investors follow Sir Martin Sorrell’s view (btw his S4C (SFOR.LN, Not covered) was a reverse, not an IPO) who opines, "When you have a legacy company, and all the holding companies have legacy bits, that business is more challenged than if you start with a clean sheet of paper. Starting clean enables you to choose where you are going to go and areas of activity, without being a prisoner of history. While legacy businesses have the advantage of people with great talent, contracts and networks, historic structures impose conditions on operations that make it more difficult.” The wake-up call. 2019 was the quietest of IPO years. But we think that the market will start up again in 2020. Now, the onus is on UK Capital Markets to look not only domestically, but also globally, to attract the brightest to the UK. The UK has a superb IPO track record. Looking to the IPOs since 2010, buying all that are still on the market gives a 155% return (priced 3 February 2020, 08:45 GMT). However, there are some points to note. (i) The IPO market is characterised by binary outcomes - this is a stockpicker's paradise. (ii) There is a residual effect of the Neil Woodford fund collapse, meaning that it may be harder (read: more expensive) for smaller/illiquid firms to ‘get away’ and to attract an audience in the aftermarket. (iii) The best performing IPO of the last decade was Blue Prism (PRSM.LN, not covered) – it has recorded a 2,136% return since its March 2016 IPO. (iv) While the era of Global Britain may have dawned, foreign domiciled companies have had the poorest post-listing track records. (v) We are not through the uncertainty as the UK’s final trading relationship with the EU, our biggest trading partner, is not decided and 60% of London firms anticipate a ‘Brexit Brain Drain’, where tech talent leaves the UK post-Brexit.
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03 Feb 20
Expansion on track
Gamma has this morning published a 2019 trading update which provides strong evidence of two key trends – the UK business continues to take market share and deliver strong profits and cash, and the nascent expansion into Europe is faring well, with good growth and integration on track. Given that the metrics appear materially in line with our (and consensus) estimates, we make no changes to our forecasts, but note the positive commentary around performance relative to expectations.
15 Jan 20
Further upgrades follow strong H1 performance
As presaged in Gamma’s July trading update, the first half of 2019 has been another strong period of trading for the Group. We are upgrading our revenue estimates by between 3% and 6% and adjusted EBITDA by between 11% and 19% across our three-year forecast horizon. The results show further good growth in the UK across both the direct and indirect businesses while the acquisitions in the Netherlands settled into Gamma ownership with a solid first half. With strong growth across the major product groups in what is proving to be an increasingly competitive market, we believe that the interims provide further evidence that Gamma is continuing to balance near-term delivery with the execution of the its longer-term strategy. Given another strong half year, the outlook comments in the announcement are, unsurprisingly, positive about the Group’s future performance.
03 Sep 19
An impressive first half
Gamma’s H1 trading update reports another strong performance. In light of that, while management expects full year revenue to be within consensus range, it anticipates that EBITDA and EPS for FY 2019E will be slightly above the range of market expectations. As a result, we are assuming greater overhead efficiency than we had previously allowed for and we are increasing our FY 2019E EBITDA estimate by £1 million to £56.5 million - with the expectation of reassessing this further (positively) at the time of the interims in September. The update confirms that there has been continued growth in the UK across both direct and indirect channels. Cloud PBX sales have performed well again but there is a nod to the effects of an increasingly competitive market in the statement. Additionally, during the period, Gamma implemented the first phase of its digital transformation program in the Direct business. In all, this represents another strong period of growth for Gamma which, as CEO Andrew Taylor notes, balances near-term delivery with the execution of the Group’s longer term strategy.
10 Jul 19
Strong FY 2018 results provide forward momentum
Gamma’s FY 2018 results show the anticipated continuation of the healthy performance which the Group has provided in recent years. In particular, they feature adjusted numbers which are 3-5% ahead of our estimates which were upgraded after January’s trading update. Importantly, the commentary and the numbers are consistent with recent trading updates and the evolution of Gamma’s strategy which was announced in some detail at the recent Capital Markets Days (CMD). The channel showed further growth during FY 2018 with more contract wins while the direct business also enjoyed a good 2018 – helped by a useful tailwind from contracts won in 2017. The outlook comments are positive and note the visibility afforded by the Group’s recurring revenue base. We make some small positive changes to adjusted estimates for FY 2019E and FY 2020E and introduce estimates for FY 2021E. In viewing the continued momentum in the business, we see our numbers as conservative and we expect to see Gamma further exploit the growth opportunities which it has identified.
12 Mar 19
Gamma held a very useful Capital Markets Day (CMD) which focused on strategy for the medium to long term. The CMD ran through the approach which the Group has taken to form its “2023 Strategic Plan”. It explored the size of the market, expected changes in marketplace, the competitive environment and the main anticipated trends – together with how Gamma will place itself to best take advantage as the market evolves. The resulting key strategic priorities mean that Gamma will adopt a ‘highly focused organic and inorganic strategy’. This approach will allow the Group to evolve its strong cloud telephony position into the UCaaS (Unified Communications as a Service) market, particularly for SMEs. The group will also build on its fixed and mobile telecom strengths, expand into Europe to gain continued growth and scale, and build on its digital capabilities to ‘assure agility and sustain competitiveness’. We summarise the main points from the CMD and outline the refocussed strategy, together with its targeted impact on the direct and indirect businesses.
23 Jan 19
Trading update underlines consistency
In a trading update ahead of this week’s Capital Markets Days, Gamma has announced that EBITDA for the year ended 31 December 2018 is anticipated to be at the top of the range of market expectations with revenue and adjusted EPS in line with consensus. This reflects strong demand for its key UK products. The channel showed further growth with more contract wins while the direct business also signed ‘significant’ new contracts. Gamma’s new “Collaborate” product will launch later in Q1 2019. The integration of Dean One in the Netherlands (acquired in October 2018) is progressing ‘in line with expectations’. In December, Dean One launched Mobile Wholesale, a strategic partnership with T-Mobile. The Group has also formed Gamma Ireland. Given that we are at the lower end of the consensus range for EBITDA and EPS (although mid-range on revenue), we take this opportunity to adjust our margin assumptions and upgrade our Adj. EBITDA estimates by 5%-6% over our forecast horizon. That produces a 6%-10% increase in our Adj. EPS estimates.
14 Jan 19
Acquisition in the Netherlands
Gamma has announced the acquisition of DX Groep BV (Dean One), a leading telecoms group based in the Netherlands and one which it has known for some time. Funded from its existing cash resources, Gamma will pay up to €27.2 million with an initial consideration of €13.2 million and up to €14.0 million payable next year. Total consideration will be based on 7.5x the 2019 EBITDA of the acquired business which compares to Gamma’s historical ratio of over 21x. This attractively-priced acquisition represents Gamma’s first entry into a local channel in a new geographic market. The Board notes that Dean One can be ‘a focal point through which Gamma can broaden its geographic footprint in the medium term’. This evolution of Gamma’s strategy brings the opportunity to build a business which taps strong market growth in the Netherlands in the same way that it has succeeded in the UK. It also suggests that other European markets may be considered in the future. In addition, Gamma notes that a number of revenue synergies have already been identified. We increase estimates to reflect the acquisition with the main impact on FY 2019E and FY 2020E where our Adjusted EBITDA numbers increase by 4%.
02 Oct 18
Another impressive performance
Gamma has reported another half year of strong growth. In particular, Cloud PBX and SIP Trunking continue to shine. The Group’s performance underlines the success of its focus on supporting its channel partners and driving the direct business in the direction of larger enterprises and public sector customers on longer term contracts. Gamma is building a good pipeline of new business and a number of product launches and updates are planned for the second half. The reported numbers reflect the adoption of IFRSs 9, 15 and 16. As previously flagged, in combination (but predominantly IFRS 15) they reduce EBITDA but leave adjusted EPS relatively unaffected. The decision to treat share-based payments as a non-adjusting item means that there is some impact on Adjusted EPS from that source, though. Prior year numbers have been restated to give a like-for-like comparison. We adjust our estimates for the healthy growth in the business and to reflect the accounting standards that Gamma has adopted and the treatment of share-based payments. Our estimates remain conservative, in our view, and we look forward to further positive trading news.
03 Sep 18
Strong trading continues
Gamma’s trading update for the first half of its current financial year highlights strong revenue and margin growth across all business areas. The upbeat announcement says that management expects the results for the full year ‘to be at the higher end of the range of Board expectations’. With the Group required to report its interims under new accounting standards in September, we are leaving estimates unchanged at present but will update numbers to reflect first half trading and the effects of IFRSs 9, 15 and 16 at that time. We note, however, that the Group ended the half year with a healthy cash balance which is ahead of our current year-end estimate. New CEO Andrew Taylor took over from Bob Falconer following May’s AGM with the handover ‘well received and successfully completed’. In all, the update presents a welcome continuation of momentum and growth.
12 Jul 18
Growth products drive ongoing performance
Gamma has reported Adjusted EBITDA 2% ahead of our estimate at £41.6 million. Overall, revenue, margins and earnings increased despite the continued decline of the traditional business in the partner channel. While the mobile proposition has been slower to become established in the channel, it is now growing and Gamma’s Cloud PBX and SIP Trunking products continued to grow ahead of the market. Gamma launched its initial fixed/mobile converged offering in December and its new high capacity national optical network project remains on schedule. The direct business announced a number of significant contracts as it produced its best year to date with the Public Sector base securing new wins. The outlook statement states that the Group is ‘in great shape for 2018 and the foreseeable future’. Gamma has also announced the appointment of new CEO Andrew Taylor who will take over from Bob Falconer following May’s AGM. We have upgraded estimates for FY 2018E and FY 2019E to reflect good growth prospects, and we introduce new FY 2020E estimates.
22 Mar 18
Full year slightly ahead of expectations
Gamma’s trading update for FY 2017E reflects continued strong growth in all its non-traditional products. Adjusted EBITDA is anticipated to come in slightly ahead of market expectations. Given that we are at the top end of consensus, we leave estimates unchanged although we note that the year-end cash position is better than our number. As expected, momentum from a good first half looks to have continued through the rest of the year. Consequently, we expect to see good profitability in both the direct business and the growth products in the indirect business when results are reported in March. For the year as a whole, Gamma’s Cloud PBX and SIP Trunking products continued to grow ahead of the market while the direct business announced a number of ‘significant’ contracts. As flagged, Gamma launched its converged offering before the year-end. In all, Gamma looks to have delivered a strong performance in 2017, living up to the potential seen in the interim results.
23 Jan 18
Small Cap Breakfast
Hydrominer GmbH, An Austrian cryptocurrency miner, is considering an initial public offering (IPO) on the London Stock Exchange AIM during 2018 according to an article on Bloomberg | Block Energy—a NEX Listed UK based oil exploration and production company whose main country of operation is the Republic of Georgia, looks to join AIM end of February 2018. Offer TBC | Cradle Arc—holding company of a group of companies focused on the exploration and development of precious and base metals projects in Africa. Offer raising £2.4m with market cap of £20.13m. Expected 24 Jan 2018 | OnTheMarket—Intention to float on AIM to raise c.£50m which will be used to fund the growth of the OnTheMarket.com portal, already the third biggest UK residential property portal provider. Expected valuation £200m to £250m.
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23 Jan 18
The Beauty of Being Different
Gamma Communications (LON:GAMA) is a communications services provider to the UK business market, with a focus on specific services where the company has a competitive edge. The share price has dramatically outperformed UK business telco peers in recent years (chart p2). In this report we focus on some of the key differentiators.
27 Nov 17
Strong H1 performance
Gamma has reported strong interim results with near 10% revenue growth and adjusted EBITDA at half our annual estimate for FY 2017E – the latter reflecting good profitability in both the Direct business and the growth products in the Indirect business. Adjusted EPS increased by 15% and the Group has declared a 12% interim dividend increase. Superior performance from Cloud PBX and SIP Trunking continues and growth in data products was also c.20%. The direct business reported a pleasing number of key new business wins and the indirect business saw Channel Partner numbers increase again. Gamma saw increased data traffic on its new mobile network and the Group remains on track to launch its converged fixed/mobile product later in 2017. The outlook statement is positively enthusiastic. At this stage, we make modest increases to our FY 2017E estimates to reflect the strong interim performance and prospects for the second half. We think the balance of risk remains on the upside. Our estimates for FY 2018E and FY 2019E also increase to reflect the adjustments to the current financial year.
05 Sep 17
Business moving ahead on all fronts
Gamma has this morning published a trading update covering H1 2017 (six months to June). The group is described as “perform[ing] well” and having delivered “another period of solid growth”. We leave forecasts unchanged until we see the detail of H1 in early September, but the balance of risk to numbers is clearly on the upside.
04 Jul 17
Small Cap Breakfast
Harvey Nash Group— Provider of professional recruitment and offshore solutions moving to AIM from Main. No capital to be raised. Mkt Cap c. £57.8m. | AnimalCare—RTO of Ecuphar NV, a European animal health company. £30m raise. Ecuphar FY16 rev £68.4m, underlying EBITDA £8.9m. Due 13 July. | Angling Direct -Schedule 1 from the specialist fishing tackle retailer in the UK . Raising £9m of which £7.4m new money. Mkt cap c. £27.4m. Due 13 July | NEXUS Infrastructure—Offer TBA. Provider of essential infrastructure services to the UK housebuilding and commercial sectors. Expected 11 July. FYSep16 rev £135.7m. | Tatton Asset Management –Sch 1. Provider if services to FCA authorized financial advisers. Raising £10m at 156p. Secondary offer £41.6m. Due 6 July. | GYG—Intention to float by the superyacht painting, supply and maintenance company. Due 5 July. Raising £6.9m new plus vendor sale of £21.5m at 100p. Mkt Cap c. £47m. Revenue of €54.6m in FY16 and adjusted EBITDA of €6.7m. | Greencoat Renewables - Schedule 1. Targeting a portfolio of operating renewable electricity generation assets, initially investing in wind generation assets in Ireland. Offer TBC. Due Mid July. | QUIZ— Omni-channel fast fashion womenswear Company intention to float. Due July 2017. Offer TBA | I3 Energy –Schedule 1 Update. Independent oil and gas company with assets and operations in the UK. Offer TBC, Mid July admission. | Verditek— Sch 1 update. The Company's subsidiaries will be involved in advanced solar photovoltaic, filtration and absorption technologies specialising in providing environmental services. Issue price 10p. Admission late June. | Rockpool Acquisitions—Northern Ireland based Company seeking strong NI acquisition with an international outlook. Raising £1.5m at 10p. Due 5 July. | Hipgnosis Songs Fund investment company offering pure-play exposure to Songs and associated musical intellectual property rights. Prospectus yet to be published. | Impact Investment Trust—Exposure to a diversified portfolio of funds providing SMEs across developing economies with the growth capital they need to have a positive impact on the lives of the world's poorer populations. Raising up to $150m at $1.00 | Residential Secure Income - social housing REIT raising up to £300m Admission due c.12 July. | Curzon Energy—Report on Proactive Investors of intended LSE float this year with acquisition of coal bed methane assets in Oregon. Looking to raise £3m plus. | NLB Group—financial and banking institution based in Slovenia, with a network of 356 branches. Seeking Ljubliana Stock Exchange listing with GDRs on the LSE. Expected mid June. | Kuwait Energy— has not been able to complete its initial public offering as announced in its Intention To Float of 3 May 2017. However, in light of positive feedback from potential investors, the Company remains committed to obtaining a London listing and continues to explore its options. | Supermarket Income REIT– Up to £200m raise to acquire a diversified portfolio of supermarket real estate assets in the UK, providing long-term RPI-linked income. Due 21 July.
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04 Jul 17
FY 2016 results confirm further strong delivery
Gamma’s FY 2016 revenues, Adjusted EBITDA and Adjusted EPS numbers were a touch ahead of our estimates. We make small upward adjustments to forecasts for all three years of our forecast horizon reflecting that performance. Gamma is capitalising on its position as a nimble player in an attractive marketplace. It made strong progress in 2016 as Voice over IP technology drove uptake of SIP Trunking and Hosted PBX services - both areas where Gamma has strong platforms. In addition, data services reflected Gamma’s investment in its network, channel partner numbers increased again and the indirect business accordingly showed strong revenue growth. The Direct Business also produced good growth and won some significant new contracts. The outlook statement is ’enthusiastic’ about the current year and comments that the Board ‘remains open to suitable M&A opportunities and areas for strategic capital investment’. Overall, an optimistic picture, in our view.
21 Mar 17
Seizing the opportunity
Gamma operates in the UK market for corporate voice and data connectivity. The group sells mainly through reseller “Channel Partners” (numbering almost 1,000) and Gamma is geared up to support and assist these (generally small) organisations in building their bases of end customers. Advances in technology are driving companies to adopt new platforms, where Gamma has a competitive offering. We initiate coverage with above-consensus estimates, and in this note detail our reasons for this optimism.
23 Jan 17
Small Cap Breakfast
Jackpotjoy — Prospectus now approved by the FCA. Admission to Official List expected 25 January. Eco (Atlantic) Oil & Gas—TSX-V listed oil and gas exploration has announced its intention to float on AIM. Assets in Guyana and Namibia. Proposed £2m-£3m fundraise. Diversified Gas & Oil—According to LSE website first day of trading on AIM now expected for 30 January.
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23 Jan 17
Technology Review - FinTech: The Second Mouse Gets the Cheese...
The FinTech market is a vast and still largely uncharted ocean of opportunity. Trillions of dollars move around hundreds of countries every day; and that is just between banks, never mind individual customer transactions. The banking systems that facilitate this activity are by and large 30 to 40 years old and have evolved from multiple systems developed in many different countries. The opportunities to improve the systems are equally as vast as the market, though by necessity it will be a process of evolution rather than revolution, as no one company is going to persuade all the banks to change all the systems in one go. There is therefore plenty of market to go for. The first wave of “FinTech” companies has now blazed the trail. Some have succeeded and some have fallen over. Most have had to re-think and re-invent their models many times. In all respects the big prizes are still there, but there is now much more information on how best to access them.
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08 Oct 15
Adding new avenues for growth
Gamma has released strong H1 results showing impressive revenue and margin improvements, which highlight the success of its leading position in the SIP market and its channel partner (CP) strategy. A number of factors look set to continue to drive revenues and margins and support market sentiment: ongoing expansion in the number of CPs, up 8% in H115, further large customer wins, the launch of MVNO cellular services in H116, mobile convergence services in 2017 and the opening of the UK government market to SME tenders, for which Gamma is well positioned.
15 Sep 15