Gamma sets tone for further upgrades

by Graeme Evans from interactive investor |

AIM stock Gamma Communications continues to connect with investors after another strong update today.

Highly-regarded growth stock Gamma Communications (LSE:GAMA) set the tone for 2020 today when the business services provider called up numbers in keeping with its lofty rating.

Gamma's shares rose another 4% to 1,385p after its latest forecast-beating update pointed to a big jump in 2019 underlying earnings, with demand remaining strong in the UK and Dutch business markets for its portfolio of voice, mobile and data products and services.
It also continues to report progress in rolling out its offer in audio and videoconferencing and instant messaging, which are seen as key to helping Gamma fulfil its ambition of becoming a major player in the fast growing Unified Communications as a Service sector.

At the same time, it has increased the already high percentage of recurring revenue it earns from helping companies with their communications systems. Recent business has included multi-year contracts with HMRC, Hogg Robinson and HM Land Registry.

This growth has been reflected in a 80% jump for shares over the past year, with Gamma now trading on a price/earnings (PE) multiple of 30 times Stifel's 2020 earnings estimates. The broker, however, continues to retain a “buy” recommendation and said the premium was merited for a company with 92% recurring revenues.

Stifel added that Gamma was now the number one player in its core SIP trunking and cloud-based PBX markets. They said:

“We expect Gamma to penetrate both markets further as it leverages its relationships with channel partners and pursues cross/upselling opportunities, particularly as a unified communications environment comes to the fore.”

The broker is reviewing its 1,300p target following today's update, while counterparts at Investec Securities have retained their 1,530p estimate. They said that underlying earnings and earnings per share for 2019 were likely to be between 4% and 7% ahead of forecasts, well ahead of the £48.3 million recorded last year at £63.9 million.

Investec thinks that the shares may mark time in the short term before benefiting from further upgrades in 2020, based on the “attractive combination” of organic growth, operational gearing and further M&A activity.

Our head of equity strategy Lee Wild also recently picked Gamma as one of his three speculative growth picks for 2020, alongside Team17 Group (LSE:TM17) and 4imprint (LSE:FOUR).

The stock was the AIM Company of the Year in 2018, having listed on the stock market with a valuation of £150 million in 2014. It is now worth more than £1.3 billion.

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Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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