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Gamma Communications is a superstar stock
With a growing track record for under-promising and over-delivering, Gamma Communications (GAMA:AIM) is a fairly unique play on integrated IT and communications using cloud technology.
Already a strong growth trend, the Covid-19 pandemic has hastened most organisations in their shift to embrace cloud flexibility and cost efficiency and we believe Gamma will increasingly emerge from under the investment radar.
Valued at £1.4 billion, it would go straight into the FTSE 250 index if it chose to depart AIM, and it may do so in time.
Out-competing both large and small rivals for years, Gamma is a technology-based supplier of communications solutions, or unified communications-as-a-service (UCaaS) as it is known in the industry.
The traditional telephony-based office is being transformed by new technology and mobile communications, and now businesses are embracing working from home more than ever.
Gamma has been taking advantage through a suite of in-house-designed products. Integrating services like Microsoft Teams has seen demand boom.
In 2019 the profitable, cash-generative and dividend-paying company reported a 15% rise in revenue; 10% was organic, a growth rate rare in the telecoms industry. About three quarters of the £329 million overall revenue came via its army of more than 1,000 channel partners. The rest comes from direct sales.
With a strong track record for developing communications solutions we would expect the company to continue expanding its suite, creating an increasingly compelling value and service-based proposition.
Traditionally UK-only, Gamma has expanded into Europe over the past 18 months through sensibly priced acquisitions, accessing markets in Spain, Holland and now Germany thanks to the purchase of an 80% stake in HFO earlier this month. Cloud computing penetration is much lower in Europe than the UK, and several years behind in technology adoption.
Analysts estimate that just 5% to 6% of organisations have shifted to the cloud so there is a huge opportunity for Gamma to cross-sell its best-in-class converged communications services to the enlarged customer base. That should see gross profit margins continue to escalate as they did last year, up five percentage points to 51%.
Covid-19 may have slowed the pace of installations, but this would be merely a temporary hiatus. More than 90% of revenue is recurring and billed monthly.
Compound annual revenue growth has run at about 20% a year since Gamma joined AIM in 2014, while its share price has soared by 700%.
The stock is not cheap, trading on around 29 times consensus 2021 earnings of 52p per share, but this is justified given the scope for future growth.