Gym group (GYM LN) cheap and cheerful
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.
Caution is needed with Operating leases liabilities currently at GBP 174m of which GBP 111m mature in more than 5yr.
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