Venture: Mid-Cap Communications

Keeping in touch.

Venture: Mid-Cap Communications

Issue 17;

Keeping in touch.

Gamma Plc (GAMA)

“GAMA provides communications products and services across the UK and Europe. We specialise in business-to-business communications, and it is our mission to make communication more human.
Business communications include everything from phone calls, broadband connectivity, chat and video conferencing to network and asset management and call centre infrastructure. For over 20 years we have built a comprehensive portfolio including market leading products and invested significantly in our support and services functions making us the communications provider of choice for thousands of businesses, varied in size.”

GAMA is a growth stock with a revenue trend rate of around 10%. Recent recommendations have been heavily value-focused, and this is a cheap growth stock. It grows with a low capital requirement, and it is asset light, with a healthy return on invested capital of 18%. It has 50% gross profit margins and is cash generative.

The UK business was founded in 2002 in Newbury, the home of Vodafone. Little surprise it’s a boom town for telecom startups. 85% of sales take place in the UK, but they are expanding in Europe through small acquisitions since 2018, typically around £20m. They say their services are less widespread on the continent, which will provide a lasting growth opportunity.

Sales last year were £506 million, which generated £90 million of free cash flow. You can see what’s happened to the rating as growth took a knock during the pandemic, a recurring theme in Venture stocks.

Growth Glitch

Source: Bloomberg

This has sent the free cash flow yield to 7.9%, which is attractive, especially for a growth stock.

High Free Cashflow Yield

Source: Bloomberg

The balance sheet is close to being debt-free, and the company sits on £110 million of net cash, ready for a rainy day, or perhaps an acquisition. Better to pay with cash when the shares are undervalued. The shares trade on 15x ’24 earnings, compared to 22x for last year. The dividend yield is 1.3%, but that’s not the point of this trade, and frankly, I hope they don’t increase it beyond its current 12% growth rate.  

They describe the company as being UCaaS (Unified Communications as a Service), which means it’s all about repeat revenue. They grow through partnerships with companies like Cisco and Ericsson. Their latest trading statement was upbeat.

The shareholder register is strong, with Lion being the largest shareholder, with a large holding in their special situations fund. It’s nice to see Polar Capital there too; another respectable name. But the real fans are the company officers who have been consistent buyers.

The 7 analysts (6 buys, 1 hold) have a price target of 1667p against a current price of 1184p, which implies a 41% upside. This is a classic GARP situation, an acronym for growth at a reasonable price.

Risk

This is a quality growth company trading at a low price. The shares typically trade £1.3 million per day, which is reasonable for a £1.1 billion market cap company. The risks are the unknowns, but it seems to be a straightforward situation. Volatility is low at around 25%. I deem this to be medium to high risk.

Venture Update

Team Internet (TIG) gave a trading update and reported growth ahead of expectations.

Speedy Hire (SDY) gave a trading update this week, which led to a downgrade in forecasts. Although resilient under the circumstances, SDY is confirming that market conditions are tough, and I doubt the shares move higher until conditions improve. The important thing is that SDY is significantly undervalued and very likely to survive a weak economy. You could wait, but at these levels, any positive news will be well received, and the share price could move higher quickly. Reiterate buy.

Venture Pricing

Thank you for your feedback on Venture and our plans to raise prices, which we need to do. We aim to provide excellent services in exchange for a fair reward. We are having discussions and will let you know of any changes soon.

Note: Prices are recorded at the time of recommendation.

Please let me know your thoughts by emailing me at charlie.morris@bytetree.com or tweeting me @AtlasPulse.

Many thanks,

Charlie Morris

Editor, Venture


Venture is issued by ByteTree Asset Management Ltd, an appointed representative of Strata Global which is authorised and regulated by the Financial Conduct Authority. ByteTree Asset Management is a wholly owned subsidiary of CryptoComposite Ltd.


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