The GYM Group #GYM

Friday, Feb 08 2019 by
9

The Gym Group #GYM was floated on the AIM market in November 2015 at a price of 195p / share. I've had this company on my watch list since early last year, I thought I had missed the opportunity to invest as the share price moved up to a high of 343p in September of last year before succumbing to the overall market sell off in the final quarter of 2018.
Merian Global Investors has today announced reducing its holding from 5.81% to below 5% this may explain the continued price weakness in 2019.


Current Price 207p
Mkt. Cap. £286m
EV £307m
PER 17.5
Div Yield 0.86%
WHAT DO THEY DO

The Gym Group #GYM is the second largest low cost 24/7 hour gym operator in the UK. Their business model is to rapidly expand both organically by opening new (15 – 20 gyms/year) and by opportunistic purchase and rebranding such as the acquisition and conversion of 13 “easyGym's” purchased in July of 2018.

The company aims to maximise on space and economy of scale by getting rid of non productive areas such as foyers and dining areas and concentrating on equipment space, these are generally spacious gyms that can accommodate high membership numbers. Current membership is £15/month with no upfront fees and no contract so can be cancelled with no notice required.


MARKET OVERVIEW

The market is expected to polarize over the next few years into low cost and more expensive gyms.
#GYM's main rival is the privately owned Puregym which has a similar charging cost and structure and owns over 200 gyms in the UK.

Higher end gyms tend to create life style environments such as swimming pools, saunas, squash courts and dining areas etc. which comes at a cost of 4 x or greater.

The mid market is mainly made up from private gyms and municipally controlled such as the not for profit Greenwich leisure (GLL) which operates 194 gyms for local authorities. As a guide my local authority charge a £30 joining fee and £44/month membership for single rolling DD payment. I think that small private gyms will find it very difficult to survive in this relatively new market of large low cost gyms.

As of 2018 there are estimated just over 7000 gyms, 9.9m members with a total market value of £4.9bn in the UK.


THE INVESTMENT CASE



The company has been growing rapidly since 2012, management are clearly ambitious and driven...


........No. Gym's... Revs............. Net Prof............... Memb Nos

2012 – 32.......... £22.3m......................................... 166,000
2013 – 40.......... £35.7m.......................................... 225,000
2014 – 55.......... £45.5m.......................................... 293,000
2015 – 74.......... £60.0m.......................................... 376,000
2016 – 89.......... £73.5m............ £5.7m...................448,000
2017 – 128........ £91.4m............ £7.17m................ 607,000
2018 – 158........ £123.9m.......... £11.8m (e).......... 724,000
2019 net profit (est.) £17.1m

For any doubt about managements ambition bear in mind that in 2014 they tried to take over its main rival the privately owned “Pure Gym”, but abandoned the takeover after it was referred to the Competition and Markets Authority.

New sites take circa 2 years to mature, of the current 158 gyms only 89 are deemed to be mature so while 15 to 20 openings/year only represent circa 10% growth, there is still growth opportunities in much of the existing estate. My nearest gym opened in Sept 2017 and currently has 5,700 members.


VALUATION

As always this is the difficult part, for example how many more sites can they open before reaching market saturation? For this we need to make a few assumptions so you will need to bear with me here.

If estimates are to be trusted, net profit will have grown at a CAGR of 44% by the end of this year. I will assume a continued CAGR of 25% growth given that only 89 of the 158 sites are deemed mature and at some point in the future finding good sites will become more difficult I think that this is a reasonable assumption. This equates to net profit as follows...

2020 - £21.375m
2021 - £26.71m
2022 - £33.40m

If you apply a modest (for this kind of growth) PER of 15 this would equate to a market cap of....

£501m

A gain of 78% by YE 2022

But that figure is just the starter, the main course comes from the potential increase in monthly membership fees, #GYM (and PureGym) are currently building scale by charging very low fees. Average revenue per member per month increased to 3.3% to £14.89 for 2018, I think that this figure could easily increase over the next 4 years as sites mature and competitors close, it will also be likely that extra revenue can be added with joining fees introduced in-line with most other gym charging structures,

Membership numbers have been doubling each and every 3 years since 2012, while this growth rate will be difficult to maintain I'm going to assume that it can double again in the next 4 years to Dec 2022 to 1.45m members. Remember in 2018 there were 9.9m gym members, many of the existing gyms will struggle to compete with this business model.

Once critical mass has been achieved and subsequent membership number growth slows I think membership could quite easily increase to say £20/month, an increase of 33% of revenue that will immediately flow through to pre-tax profit (£87m/annum, circa £69m Net Profit) . This alone at a modest PER of 15 would increase the market cap by £1.035bn and does not include joining fees that I feel sure will be implemented as the gyms mature.

If you add that £1.035bn to the market cap calculated from operational profit at current membership fees of £501m (see above) we get a market cap of £1.536bn, an increase on today's price of 436%.


CONCLUSION

The above valuation contains several assumptions, however, at the current price there is clearly a great deal of potential growth to come from this company.

As always, please take time to do your own research before considering investing.

For transparency, I have a long position in #GYM


Disclaimer:  

As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. The author may own shares in any companies discussed, all opinions are his/her own & are general/impersonal. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.


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The Gym Group plc is a United Kingdom-based holding company. The Company provides health and fitness facilities. The Company operates approximately 90 gyms across the United Kingdom that are open around the clock. The Company offers gym memberships. Its subsidiaries include The Gym Group Midco1 Limited, The Gym Group Midco2 Limited, The Gym Group Operations Limited and The Gym Limited. more »

LSE Price
195.2p
Change
-2.9%
Mkt Cap (£m)
269.3
P/E (fwd)
16.4
Yield (fwd)
0.9



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18 Posts on this Thread show/hide all

jonesj 8th Feb 1 of 18
1

Thank you for the analysis.

The directors made some well timed sales in September and November, at over £3 per share.    Three significant disposals.     

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kalkanite 8th Feb 2 of 18
1

Thank you jonesj

Always good to be cautious when directors are selling. Mind you both Fever Tree directors/founders sold over 17m shares between them in March 2016 at a price of £6.35 and then another 30m shares at circa £20 in July 2017. The shares rose to just shy of £40 after that.

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tiswas 8th Feb 3 of 18

The Gym Watford is 18.99 pm for new members, I think I pay 17.99, and seems very busy this year compared with the past. The only negative is that the car park is not big enough.

For this reason, and those set out above, I have recently bought in.

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kalkanite 8th Feb 4 of 18

Hi Tiswas

That's interesting. I wonder if it is a "mature gym" and therefore increasing its fee accordingly. As said above my local gym charges £15/month, it opened in Sept 2017 and has 5700 members, I joined just before xmas and have no trouble getting on the equipment at these membership levels.

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tiswas 8th Feb 5 of 18

In reply to post #445388

That is what I like about the business model. I have never seen the gym so busy yet they seem to be gradually increasing fees.

Hopefully it is also brexit proof and the fees are such that I would not envisage high churn, 4 pounds a week give or take is not the sort of thing you would cancel unless in dire financial straits imo.

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Snoo 8th Feb 6 of 18
1

How do you know membership figures for a particular gym?

I am a member of one and am pretty happy, but I would have thought there is a natural maximum that can be reached before diminishing returns kick in. Visiting my gym at peak hours (5.30pm-6.30pm) is an unpleasant experience, with busy changing rooms and also demand for the equipment apart from the cross trainers and bikes (they have plenty of those).

The problem as I see it, is that there is also a limit on prices as well. Each town probably can be considered on its own merits as regards to the competition, but I probably wouldn't pay £30 for it, the local Better gym is only a little bit more but has more facilities for the price. Add to that you can pay a couple of quid extra and get swimming as well.

Personally I think they are running a tight ship, but I also don't think this is an easy business to be in. One gym near me has changed from Fitness First, to EasyGym, to now the Gym over the past decade. One must presume the rent costs are really high, because it was always busy.

I do wonder if some of the other gyms are pretty marginal in profits and may end up being rationalised. A place like Redhill has high property prices but low population, quite difficult to imagine this maturing into a 5,000-member branch. Even at 5,000 members that equates to £1.2m membership fees per year, considering wages and rent have to be paid out of that, it does not seem like a cash cow.

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kalkanite 8th Feb 7 of 18

"How do you know membership figures for a particular gym?"


I asked a trainer at the gym.

You make a good point about higher end gym's and local authority (LA) gyms having pools etc. This works for many people however you pay a price for that. For me personally I just want the gym experience so it would be foolish for me to pay for stuff that I wont use. There are no children playing around on equipment at my gym, unlike some LA gyms as they tend to draw family memberships.

The 24/7 opening hours will also attract people such as those working shift work so very much a case can be said for both the low cost gym and the lifestyle gyms.

Regarding profitability, I've just noticed that Stockopedia has today downgraded its net profit for 2019 from £17.1m to £16.5m still strong growth. I believe this is a result of the later than expected new openings for 2018.

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Zipmanpeter 11th Feb 8 of 18
1


I have a similar view on GYM (LON:GYM) and recently bought in at 205p as I think the recent falls are overdone on the 3-4 year horizon I am buying for.  I hope for recovery to 250p by end Dec 19 and >400p by 2022

For instance, the profit fall you mention may also reflect the move to a new deal for (self-employed) personal trainers operating out of Gym outlets.  In the last update it was said this will cost an extra £1mn pa across the estate of 150 gyms but getting the best trainers will retain/attract via word of mouth many members in the Gym system long term and also provides a stream of potential Gym managers.  Much better than expensively employing them!

 I love the transparency of their financial model (printed as P26 of annual results presentation !) and visibility on cost drivers, membership numbers etc.  Seems a very low risk roll out to me as i) lease costs (25% of total) are likely to fall in medium term  ii) all costs seem metronomically stable ie we know what the next 150 units will cost to open and the path to maturity at site level seems clear.  I already think Gym, together with MindGym have got the scale and momentum necessary to be leading players in the low cost segment and will be very hard to catch - critical as low cost "no frills" gyms squeeze out the mid-market (a la classic Porter competition theory)

So rRather than re-stating the bull case, what worries you most about Gym as an investment?

My biggest concerns are a deep consumer recession (although this would likely accelerate mid- to low cost migration) and less tangible, a move away from buff bodies as an ideal.  



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Adrian Hernandez 11th Feb 9 of 18
1

Thanks for your comments.

About a recession scenario, let me show two real examples:

1.- About GYM (From an article published in the FT):

How have you survived the recession?
We started The Gym Group in 2008, when people were looking to save on outgoings. Within
three years we had made our first £1m profit. Half of our members joined from much more
pricey health clubs. As the economy improved we have not seen them going back to spending
money on more expensive alternatives, which is exactly what you see with airlines and the retail
supermarket sector. People are quite happy to shop at Waitrose, but also to use Lidl and Aldi.
There is no stigma.

2.- Pure Gym's CEO about the same matter:

"Cobbold said: " This business was born and bred in a recession — we opened our first gym in November 2009 and the gyms took off like a rocket right from the early days. There's a counter cyclical history to the business."

In my opinion, the market is underestimating GYM's growth potential. The company is mantaining its EBITDA margins of 29-31%, substract from that 6 or 7% of maintenance capex, interests, taxes, and add the changes in working capital (which are recurrently positive), and that's the "underlying" FCF that the company would generate if it didn't open 1 single gym.

Besides, during 2019 or 2020 the company will generate enough Operating Cash Flow to finance its organic growth of 15-20 sites per year, becoming less dependant from financial debt or equity issues.

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kalkanite 12th Feb 10 of 18

Some good points in the two comments above.

Regarding the bear case I agree with the worry of an impending recession which is why I still hold a large percentage of cash in my portfolio. Like Adrian I believe that much of the resulting loss in current membership will be mitigated by people shifting from higher cost gyms to the low cost model.

The only other concern is how many site openings before the business reaches maturity? My finger in the air feeling is that the model has another 3 to 4 years, at which point the low cost gym operators will be looking to maximise rev/user, capex for new openings will disappear, FCF should improve greatly along with dividends.

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jonesj 13th Feb 11 of 18

In reply to post #446083

The idea that all the low cost gym operators will stop capex and increase prices as the market matures is idealistic. Of course, that might happen.
Alternatively, they might put in excess capacity, have price wars and have to contend with new entrants. As happens in many industries.
Perhaps I should check the director incentive programmes, as if they need growth for these to pay out, continued expansion is likely.

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kalkanite 13th Feb 12 of 18

I have to disagree on condition that the CEO of these companies know their business. For example GYM wouldn't open up a new premises next door to PureGym and vice versa, that would end up with as you say a price war, lower ROCE and profits. Any half decent CEO knows that trying to muscle in on other low cost competition would be a race to the bottom. It is all about reaching scale by opening in opportunistic areas as quickly as possible, once growth in numbers slow then I expect ALL of the low cost gyms to raise prices.

I like what I have seen of the GYM board, they are creating the low cost experience while maintaining quality as shown in their decision to take a hit on profits in order to attract good quality trainers and the free classes that go with this low cost experience.

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Snoo 13th Feb 13 of 18

It's bound to happen though if one of the gym groups think the opportunity is right.
For instance in Croydon, there is a PureGym that has opened about 200m away from the existing Gym.

The obvious bear case is that these low-cost gym groups do not generate any brand loyalty at all.

If for instance in the above case Gym charges £25 a month and PureGym charges £15 a month, then customers would just transfer over to them, even people that have been going years. The reason people join the Gym is because it is cheap, not because has the best facilities. (Accept that some people join because of the 24 hours, but this would be a tiny percentage).

It seems that the low-cost model is here to stay, and the closure of high street stores is actually bringing a few suitable places for city-centre gyms, some of which may be available at favourable rents.

Simply raising prices without raising any quality would push these guys into the middle market, where other gyms such as Fitness First have floundered.

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kalkanite 13th Feb 14 of 18

In reply to post #446973

Very odd that PureGym should open 200m away from GYM (LON:GYM). That's either dumb or there is enough research to suggest both gyms can be supported with membership. As you say it's bound to happen on the odd occasion and clearly there is very little chance of hiking prices there.

I agree also brand loyalty means very little in the low cost arena but think that gym equipment facilities count for a great deal, certainly they do for me.

Regarding Fitness First, I have just checked their price structure, there is no gym near me so I looked at the Romford gym. Fees were as follows....

JOINING FEE

Fitness First - £15

TGG - £0

MONTHLY FEE

Fitness First

  • 12 month contract - £40/month
  • 6 month contract - £50/month
  • 1 month contract - £60/month

TGG - £15/month with no contract

The TGG fee is from my local gym and the Fitness First contract was for multi gym. I could not get a single gym price when looking online and unless you travel a great deal as say part of your work then I don't see this as a great advantage, especially as their nearest Gym to me is an hours drive away, I'm not sure if Fitness First is a 24/7 opening gym either. TGG has a walk in rate of £5.

So on price alone Fitness First cannot compete with low cost gyms unless they severely mark down their fees and to do this they would need large capacity gyms. Not having visited a Fitness First gym I assume that they compete by having extra facilities above and beyond the gym experience, if not they will struggle. So comparing the two I think that low cost gyms could raise their prices quite easily to say up to £20 per month.

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jonesj 13th Feb 15 of 18

Milton Keynes has 2 different brand low cost gyms next door to each other, in the same building (I already posted a photo on this site in Jan 2017). GYM are about half a mile from this pair.

In capitalism, excess profits get competed away if there are no barriers to entry.
As there are numerous low cost gym companies, it is safe to say the barriers to entry are low.

I agree Gym is worth considering at this price, but I haven't made a purchase.   

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Snoo 13th Feb 16 of 18
3

Yeah of course, Fitness First are caught in the middle, and are one of the reasons why low-cost gyms have been successful. But I don't think they are the competition for GYM, and by the looks of what they are doing they would rather fill the mid-market gap between the low-costs and the likes of Virgin/David Lloyd.

I don't think PureGym is actually on that sound a footing - they have something like £390m bonds paying interest at 6.3% - that's a lot of money to find - so cash generation is key for them. I don't see them raising prices any time soon. In fact a sustained price war would not be bad for GYM as they have less constraints and could also tap the markets for extra. Perhaps this is what is happening at the moment.

I believe a bigger threat might be Sports Direct. They already operate some gyms, and the low-cost model is a really good strategic fit for them. If PureGym got into trouble and Mike Ashley cuts a deal there would be some synergies across his brands.

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kalkanite 14th Feb 17 of 18
2

In reply to post #447083

Hi jonesj

I thought your example at Milton Keynes seemed a little worrying so I contacted investor relations to try and get a feel for their strategy in this instance. They replied back to me today as follows....


"Thank you for your recent email

We have got a scientific and robust approach to our site selection looking amongst other factors at access, visibility, building, competition, population numbers and density, demographics, workforce and potential market penetration. The analysis of all these factors combined with property cost and fit out cost leads us to an appraised ROCE which is our main focus when making an investment decision.

Market conditions do change of course and in the instance of Milton Keynes, we opened our gym in March 2014 at the main train station approx. 2km from an existing PureGym, which had opened in 2013. Xercise4Less decided later to take another property in the same building as Pure Gym in 2015.

All three units have been trading in Milton Keynes since August 2015.

The pipeline of new sites continues to be strong and we expect to open 15 to 20 new gyms in 2019.

Hope the above answers your question prior to the announcement of our 2018 results in March"


So it appears that Xercise for less is trying to muscle in on PureGym's position despite there also being another low cost GYM (LON:GYM) up the road.


Snoo

Re PureGym's £350m bonds @6.3%, that's quite reassuring that they could be financially limited in their expansion plans.

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Edinburgh Investor 16th Feb 18 of 18
1

Thanks for this, my investment case for GYM (LON:GYM) is very much based on a few factors.

1. People either want to pay up a lot (as suggested above) for all the bells and whistles or as little as possible, assuming the Gym has everything you need (which GYM (LON:GYM) pretty much does)
2. People are spending more time using gyms and less time playing sport (I see this in my local community), not necessarily a bad thing, all just part of a healthy lifestyle but a trend nonetheless.
3. There is another side to the investment case I think could play out over the long term. The companies ability to provide additional services as add-on's, via integrated technology (apps/classes etc). This seems to be a strategy that GYM (LON:GYM) is progressing and I like it.

Subscription services will win the day and GYM (LON:GYM) low cost approach and a market leader in this area, I believe it would hold up well in a downturn. Hopefully there are no major speed bumps along the way. For now, happy long term holder and may look to add at these levels.

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