Comms Group (ASX: CCG) is an interesting little company with a market capitalisation of about $40m, because unlike most listed businesses its size, it has actually made a profit, and paid a dividend. However, its profit is very small, with profit before tax of just about $825k in H1 FY 2026.
Comms Group has a wide array of products and services across three segments: Communications and Collaboration, Secure Managed IT Solutions, and Global & Wholesale Unified Communications.
Despite only making a modest profit, the business did generate over $37m in revenue across these segments, highlighting the low margins earned. Most of the Comms Group financial presentations focus on underlying EBITDA to make the company look attractive. However, the segment breakdown of the business on page eleven of the H1 FY 2026 report gives a better picture of the business.
The focus on underlying EBITDA in a holistic sense is useful because it shows us that none of the business segments are particularly high-margin.
I would expect a business that is selling a mixture of technology products, telecommunication products, and skilled labour to be fairly low margin. For example, perhaps the most scaled such company on the ASX is Data#3 (ASX: DTL), and even it only earned profit before tax margins of under 8% in the last half.
Nonetheless, the Comms Group profit before tax margin of about 2.1% in H1 FY 2026 is very low indeed, and there could definitely be some potential for improving margins as the business scales. Nonetheless, it is a reminder that recurring revenue does not mean high-margin recurring revenue. Sometimes revenue is recurring because the margin is already so low that the customer simply can’t save much money by switching, so they don’t.
It is definitely possible that Comms Group margins will improve with scale, but I don’t think it has any real pricing power. I suspect many of its customers could leave without too much trouble if they didn’t like the price. The reason for this suspicion is that Comms Group has not been consistently profitable.
At the end of December Comms Group had net debt of $6.5 million. Although the company says this “remains well within banking covenants with ample funding for working capital, organic capex requirements and further M&A,” it does mean the company would be more vulnerable to mishaps.
Overall, I could see a path to shareholders doing well from Comms Group.
Indeed, the company paid 0.25 cents per share in (fully franked) dividends the last twelve months, putting it on a trailing yield of about 3.3%, or over 4.7% once you include the value of franking credits, at the current price of $0.075
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That dividend won’t be sustained without some improvement in free cash flow, but the company does expect a stronger second half in that regard. And it is also very possible that if the company slows down on acquisitions, net profit margins could improve. It wouldn’t take much to see net profit before tax margins of 3.5%. This could see a net profit after tax of around $1.8m (assuming normalised tax rates).
Given the company’s cashflow should be better than profit, thanks to the non-cash nature of amortisation, you could definitely see the company increasing dividends from here. That might underpin the share price and provide a solid return over the medium to long term. In that scenario, you’d also have the possibility that the company could have a period where they do flex pricing power and print higher profits before growth is impacted.
On the other side of the ledger, I also have a lot of reasons to be wary of a stock like Comms Group. Low-profit-margin companies rarely have much long-term potential when they are small, because their scale makes them vulnerable to competition. Often, the end game for this kind of business is to be acquired, and it seems to me that a lot of the investors in Comms Group are hopeful that the business will be acquired. I really don’t like that kind of thesis because it relies too heavily on something the company cannot control: the existence of a willing acquiree.
While I definitely could see the reason to buy a business like Comms Group for its dividend yield, there are plenty of other companies of similar quality that pay a similar dividend yield to Comms Group while boasting more attractive features (such as higher margins, strong balance sheets, and a longer track record of profitability).
There is probably a real possibility Comms Group could be taken over one day, if it keeps growing profit. However, I think it faces solid competition, and I would be very hesitant to invest in the stock until it has a longer track record of profitability, to rely on as a basis for valuation.
While Comms Group stock looks more attractive now than it did a few years ago, it’s not clear to me that Comms Group has much of a competitive advantage, so I’d need a higher dividend yield for the valuation to make sense, along with higher confidence that the dividend was sustainable.
I’d consider an ability to grow or maintain net profit before tax margins as favourable, with this kind of stock. Conversely, an inability to consistently report statutory profits would be a bit of a red flag. Given the company has only just become profitable, the next couple of halves could be an important clue as to the quality of the businesses it owns.
Disclosure: The author does not own shares in CCG and will not trade CCG shares for 2 days following this article. This article is not intended to form the sole basis of an investment decision. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Ethical Investment Advisers Pty Ltd (ABN 26108175819) (AFSL 276544).
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