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quality, growth and fundamental discount for the VozTelecom parent company

GAMMA: quality, growth and fundamental discount for the VozTelecom parent company

COMPANY DESCRIPTION

Also in 2020 Gamma Communications acquired HFO Holding and gnTel. Already in 2021 the Group has bought Mission Labs Limited (for £ 40.2m and an additional £ 6m over the next 3 years). This latest acquisition will allow Gamma to improve and expand its “Cloud contact center” (CCaaS) technology. In addition, the acquisition will allow Gamma to accelerate its digital channel strategy. Mission Labs has a UCaaS technology platform called CircleLoop. Business integration is progressing well and initial performance is in line with expectations.

RESULTS

Gamma Communications recorded a 20% increase in revenue in 2020 to £ 393.8M (€ 456.86M) compared to 2019. Organic revenue growth in the period was 9% excluding acquisitions, and was lower than expected due to a reduction in sales in the second quarter due to COVID-19; commercial activity recovered its previous levels in the second half of the year. Recurring revenue grew from £ 306.9M in 2019 (€ 365.08M) to £ 359.3M in 2020 (€ 416.81M).

Last year the Group recorded a 24% increase in EBITDA to £ 79.0M (€ 90M), a 26% increase in earnings per share (EPS) to 51.3p and a 30% increase in cash generation from operations to £ 70.3M (€ 80M).

Gross Profit in the United Kingdom has continued to grow, increasing by 11% in the indirect channel thanks to its reseller and partner base, and by 21% in the direct sales channel.

European business has registered an increase in gross profit (Gross Profit) from £ 9.2M (€ 10.67M) in 2019 to £ 22.3M (€ 25.8M) in 2020, mainly due to the acquisitions of VozTelecom (April 2020), HFO Holding (July 2020) and gnTel (July 2020).

Covid-19 had very little impact on the overall financial result of the business, with levels of cancellations, defaults and online cancellations at the low levels recorded prior to the pandemic.

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GAMMA: quality, growth and fundamental discount for the VozTelecom parent companyGAMMA: quality, growth and fundamental discount for the VozTelecom parent company

GAMMA: quality, growth and fundamental discount for the VozTelecom parent company

OPERATING DATA

In the UK during 2020, key products continued to show strength and growth with a 17% increase in SIP-Trunk to 1,185,000 assets and a 15% increase in ‘Cloud PBX’ seats to 601,000 assets. The number of ‘Cloud PBX’ positions in the European subsidiaries reached 114,000 assets, compared to 22,000 at the end of 2019. This increase was mainly due to the acquisitions of VozTelecom and gnTel.

SOLVENCY

At the end of April 2021, Gamma had a robust balance sheet with up to £ 34m in cash, after paying the £ 40m of the Mission Labs purchase.

GAMMA: quality, growth and fundamental discount for the VozTelecom parent companyGAMMA: quality, growth and fundamental discount for the VozTelecom parent company

GAMMA: quality, growth and fundamental discount for the VozTelecom parent company

Solvency multiples at very comfortable levels, with the capacity to face growth without incurring balance sheet tensions.

BUSINESS OUTLOOK

The Group continues to consolidate its expansion strategy on the continent and works to accelerate growth in ‘Cloud PBX’ in Europe. Despite the pandemic caused by Covid-19, demand for its products has been positive and Gamma Communications has continued to strengthen its capabilities through the development and launch of new products and services.

During 2020 it has reinforced its strategy in Unified Communications (UCaaS), which is progressing correctly, with the strengthening of both its geographical scope and product benefits. In addition, the Group has continued to strengthen its approach to direct and indirect channels in all the markets in which it operates.

FORECASTS

Based on the evolution of the business in the first quarter of 2021 and assuming there is no new confinement in the UK, Gamma reported that it expects to reach the high band of analysts’ forecasts. This is:

Sales: £ 442.4M-£ 461.3M

Adjusted EBITDA: £ 86.0M-£ 94.0M

Adjusted EPS: 54.9p – 63.1p

GAMMA: quality, growth and fundamental discount for the VozTelecom parent companyGAMMA: quality, growth and fundamental discount for the VozTelecom parent company

GAMMA: quality, growth and fundamental discount for the VozTelecom parent company

SHAREHOLDER REMUNERATION

The Group has proposed to pay a final dividend on account for 2020 of 7.8p / share (pound-pence / share), £ 7.3M in cash (from 7p 2019). If this payment is added to the already made 3.9p of interim dividend (vs 3.5p / share in 2019), the sum represents a 11.7p total dividend declared for the full year, from 10.5p / share a year ago, which represents an 11% increase in shareholder remuneration. Since 2014 Gamma has been increasing the dividend between 10% and 15% annually. This shareholder remuneration represents a yield on dividend-Yield at prices of this report of 0.7%.

Voztelecom

As we pointed out at the beginning of this report, in 2020 Gamma Communications closed the purchase of VozTelecom by acquiring 100% of the capital. A purchase that has allowed the Spanish company to close the year with an increase of more than 10% in the number of active extensions and to estimate double-digit organic growth in 2021, according to the company’s own forecasts and provided that the pandemic do not force a new confinement.

After the integration, VozTelecom continues with its business model, in line with the one launched in 2016 with its departure to MAB and which is the result of more than 15 years of experience providing cloud communications services to companies in Spain.

This VozTelecom strategy is based, on the one hand, on developing the market through a distribution network and commercial partners specialized in the commercialization of their services, mainly those of fixed-mobile virtual switchboard, which provide companies with greater flexibility and features than telephony solutions based on conventional switchboards.

And, on the other, an inorganic growth strategy that allows VozTelecom to develop new market segments, expand its commercial capacity in new territories, as well as expand its offer of cloud solutions for companies, with the aim of becoming the operator of communications and cloud leader in Spain in the business segment.

In this sense, with the financial support of the Gamma group, VozTelecom has greater capacities to tackle new inorganic operations, a strategic aspect to achieve the leadership position in the market. A market also and according to analysts’ estimates, which will incorporate more than three million UCaaS extensions by 2025, which will be added to the nearly two million existing in Spain by the end of 2020

FUNDAMENTAL ASSESSMENT

Mobile UCaaS (Unified Communications as a Service) services are gaining weight in the business market and the availability of 5G networks will accelerate their implementation in companies, since the pandemic has raised the need for ICT solutions that allow employees carry out their activities remotely, maintaining the operations of the companies with total normality without being physically in the offices and in the future without being in the industrial plants duly connected.

Gamma Communications grows organically and inorganically and with a fast and very good integration of its acquisitions. The accounts in 2020 showed the strength of their business and from January to March 2021 they have recorded a strong increase in the main items. It also maintains a robust balance sheet with positive net cash that will allow it to continue with its growth and increase its leverage without tensions.

Based on a valuation by ratios and low average market forecast for EPS at the end of 2021 of 0.6GBP / share, the comparison against its peers favors it. The market discounts a PER of 33v for Gamma, compared to 467v for its North American competitor 8×8 and 201.5v for the also American RingCentral. The cash flow multiple is around 27v for Gamma, with room for improvement compared to 240v for 8×8 and 132v for RingCentral. The EV / EBITDA comparison also has upside potential for Gamma, with a multiple of 20v, compared to 115.4v for 8×8 and 108v for RingCentral. Its European competitor NFON, with red numbers on its income statement, is trading even tighter.

2021e

PER

CBA

PEG

PSV

PCF

EV / EBITDA

PVC

YIELD

Gamma

34.36

-11.36%

4.28

39.2

twenty-one

7.3

0.65%

8×8

467

103%

4.6

437

240

115.4

21.1

RingCentral

201.5

235%

0.85

15.27

132

108

90

0.39%

NFON

3.38

4.30

Source: Own elaboration with EI forecasts based on market consensus and price at the close of 06/08/2021

It is a quality value, a company with growth capacity, a robust balance sheet and good profitability and with a margin between value and price based on a comparison with its peers. The recommendation is positive for Gamma Communications with a view to the medium / long term.

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