Gym group (GYM LN) cheap and cheerful

logo

 

The Gym group is the easyJet of gyms, offering pay-as-you-go memberships from GBP11 a month. The stock is even cheaper than their membership fee, trades at less than x9 EV/EBITDA, does the weight lifting with a topline growth 20%-30% and a high single-digit net profit margin.

Currently trades 10% below the IPO price and 50% lower than a year ago.

thegymgp
I think one of the reasons why GYM trades below its IPO price is that gym roll out came at the low end of the expected range (15-20 new gyms pa and last year opened “only” 15 new ones). Management is careful in selecting new locations, requiring:
I think one of the reasons why GYM trades below its IPO price is that gym roll out came at the low end of the expected range (15-20 new gyms pa and last year opened “only” 15 new ones). Management is careful in selecting new locations, requiring:
a) cash break even in 3 months, b) P&L break even in 2 years
The average lease is for 15 years, all gym locations break even, never had to close a gym.
Caution is needed with Operating leases liabilities currently at GBP 174m of which GBP 111m mature in more than 5yr.
Cash generation is one of the reasons why I think the Gym is very attractive. If we were a private equity group, able to take GYM out of the market at the current price, we could make a nice 9% operating cashflow yield (or 7% after maintenance CAPEX) and forget about expansion.
gymfa
 Besides the attractive valuation, Gym members love the chain too. In times of economic uncertainty consumers become more price sensitive (also seen at recent B&M results) Google trends show that low cost gyms are gaining traction overtaking premium gyms like Virgin. I think this trend will continue, as inflation kicks-in and consumers try to save on discretionary spending.

 

The market: 6.5k gyms operate in the UK, the main competition come from the 2.7k public “council” gyms.
The Gym operates 86 gyms competing mainly with the PureGym, which operates 174 gyms. They tried to merge in the past, but competition authorities didn’t approve it, because a merger would reduce market competition.
Overcapacity threat? Unlikely for now. PureGym, Gym’s largest competitor, remains careful on pricing and utilization because runs on a highly leveraged balance sheet. Is still owned by private equity group (CCMP Capital) and according to the latest financial statements published on Companies House (FY15) Net Debt stands at  x3.8 EBITDA, or GBP70.5m Debt on Revenue of GBP99.5m

Barriers to entry: a) know how: a typical Gym operates with only 2 full-time employees, servicing between 5,000-6,000 members.
b) location location: it’s very hard to compete with the cost leader after a critical mass is reached (see mcFit in Germany)

Gym economics: They Gym currently has 424k members +24%yoy 
An average gym site at maturity reaches 6k members (pre-opening 3k, in ’17 they can reach c 20% growth only from maturities without needing new gym openings)
Targets min 30% ROCE per gym, Average CAPEX per gym GBP 1.5m, EBITDA 0.5m
Roll out strategy: open 15-20 gyms pa, 

Market: management reckons there is space for about 500 low-cost gyms in the UK (currently we are half way through that number)
Total UK market: 6.5k gyms, competition from 2.7 public “council” gyms, but council finances get tighter (ask Lakehouse LAKE LN shareholders) 

Management: CEO John Treharn, was CEO at Dragons Health Clubs, acquired by LA Fitness. An interview can be found here: https://vimeo.com/12094697
in brief: they won’t buy existing gyms, only build from scratch. Paperless admin. 40% of members come to a gym for first time. Low cost is entrenched in their philosophy (energy spending, cleaning products, admin). Attrition similar to normal health clubs. Going overseas: might go with franchising, no direct investment.

Disclaimer: Do your own research, this is just a blog post

9 comments

  • Market cap is 3x top line revenue for a gym chain with 5.9x leverage to operating income.

    Not sure if that can be considered cheap…no wonder Pure Gym’s IPO had little uptake!

  • Hi Tony, Thank you for your feedback

    Valuation: I agree EV/Sales at x3 times appears expensive, but is a business with 30% EBITDA margin, excellent cashflow conversion and a decent FCF yield.
    In the US, Planet Fitness (PLNT US), trades x6.5 EV/Sales

    Leverage: Net debt at the moment is GBP2.5m vs EBITDA of GBP20m, so I think financial debt isn’t an issue here. Operating leases, yes can be a risk, but I want to believe they will remain careful about picking locations, with a focus on quick cash payback.
    Pure Gym’s IPO I think had little uptake because they had to face an already listed, cheap comparative. This made it hard for brokers to float PureGym on a punchy valuation.
    I think there is a general de-rating in Leisure stocks (see Whitbread WTB LN), but in a deteriorating environment some companies with a strong value proposition manage to increase their market share

  • Got you.

    Difficult thing here is accounting for FF&E (capex) when rebasing their adjusted EbITDA. I would approach it like a hotel valuation, a depreciating asset with high FF&E

    Just found in their reports that the cost of onboarding a venue is £1.3 to £1.4m.

    80 venues secured, so a fair BV should be c. £110m.

    Why shall we buy this company at any premium to the cost of venue acquisition?

    By that logic, the stock remains significantly overvalued. A lot of unrealised upside is already priced in…

    I could be wrong here, but have the feeling that gyms like serviced office stocks are overvalued in the UK simply because of the real estate underlying.

  • Hi Tony,

    Thank you for your for your contribution. I agree with your approach, say GBP110m the replacement cost of the current equipment. But to get a more accurate value of the underlying business we need to add the value of the membership fees to be received in the near future. The average attrition is about 2yrs, say 80 gyms, 6k members, each paying a monthly fee of GBP11 for the next two years yields a nice GBP125m.
    Add that to your number and the valuation comes at GBP235, which is near today’s market cap (GBP230m). So, I think none of the growth opportunity is captured at today’s price.

    What trades well above the real-estate underlying is Primary Health Properties (PHP LN) but yield hunters chase the 4% divi, picking up nickels in front of a steamroller

  • Hi Tony

    A interesting property backed company, trading below their asset value I think is Safestay SSTY:LN
    They do branded hostels and guest reviews suggest they do a pretty good job
    Keep in touch 🙂

  • i started buying this share after visiting one of their gyms, having been a member of various Nuffield’s / Virgins over the years. I am sure there is little differentiation between Pure / the Gym / ANother low cost.

    What is clear to me is that low cost gyms have got easy pickings, taking market share from the high cost players.

    I don’t see why you’d value The Gym at book value / opening cost when they are generating 50% RoI’s on their gyms after they have been open for two years.

    There will be further placings, so upside is probably capped until PE is out, but i think they are immature with a massive market to shoot for.

  • Hi Oregano, thank you for the contribution
    Under a blue sky scenario, there’s plenty opportunity for cross-selling too. They just launched their nutrition supplements online. Just think what will happen to the valuation if their members pay an extra GBP10 per month to buy a protein bar or two 🙂

    I think Gym can differentiate, attracting the most talented personal trainers (like soul-cycle does in the US). I think most of Gym’s personal trainers are happy because they don’t have to pay a rent, like at other gyms. Instead, they have to offer some of their time free of charge for group classes.

  • Did I read something about a New Year´s resolution of one idea per month? 😉

    What do you think of Sports Direct or DFS Furniture?

  • Hello Mr Anonymous, thank you for your comment. Stay tuned, a few interesting ideas are coming up over the weekend.
    Sports Direct: I love it, simply because everyone else hates it, being un-investable to most institutionals.
    I think it trades on attractive multiples (around x6 EV/EBITDA), a steep discount to peers.
    Only because, according to my conspiracy theory, Big Mike wants to take it private in a few years time. A ruthless entrepreneur doesn’t like to overspend so he will try to depress both the stock and shareholders.
    So, every time there is a horror-show and the stock dips below GBP3 I try to buy some.
    If you are willing to take the corporate governance risk in themes like SportsDirect, you might also like the Chinese shoe maker Xtep (1368 HK). The stock is even cheaper than their shoes.. Their brand ranks among the top 10 in running shoes, selling mostly in tier 3-4 cities. It promises to pay a 4%, trading less than x5 EV/EBITDA. If their claimed cash balance is still there and not on someone else’s pocket, then it accounts for almost half the market cap..
    Shoe Zone (Shoe LN), I think is another interesting case. Cheap shoes and even cheaper shares. Family owned and promises to pay a decent divi..

    DFS Furniture, I think it is interesting, inexpensive with good free cashflow but sells high-value items (between GBP500-1k right ?). I think as consumer confidence deteriorates and inflation bites household budges, decisions about renewing a sofa would be deferred. Would a future appointment create a better entry point?
    Consensus on blomie expects for this year a 4.7% growth in revenue and net margin somewhat softer at 6.4% vs 8% a year ago. Howdens (HWD LN), another interesting company, sells kitchens to the trade at an average ASP GBP 7-10k, started reporting declining like for like sales..

Leave a Reply

Your email address will not be published. Required fields are marked *