Enjoy this free share recommendation on The Gym Group extracted from the latest edition of the premium Trendwatch newsletter…
ARE YOU by any chance into keeping physically fit? Did you ever join a fitness club? Did you waste your exorbitant membership by only visiting it once or twice early in the New Year because you lost the resolve of your New Year resolution? If so, there isn’t much we can do to help.
But if the body and spirit were willing but the credit card said no, we can show you a cheaper way to get fit and keep fit. It seems a lot of people are discovering it.
The Gym Group was founded in 2007 by its current CEO John Treharne and floated on the Official List in November 2015. It’s the UK’s second-biggest operator of low-cost gyms, the biggest being Pure Gym. By raising a net £81m for the company’s expansion, presumably it hopes to steal a march on its bigger rival, in revenge for Pure Gym stealing a march in 2015 by snapping up all of the gyms owned by LA Fitness.
In 2014, The Gym Group did actually attempt to take over the privately-owned Pure Gym, but abandoned the takeover after it was referred to the Competition and Markets Authority.
As at flotation, it had approximately 66 gyms and 363,000 members across the UK. It now has 89 of them, and nearly 450,000 members.
After five years of losses it moved decisively into the black last year, as the following track record shows.
| Year: | 2012 | 2013 | 2014 | 2015 | 2016 |
|---|---|---|---|---|---|
| Revenue (£m) | 22.3 | 35.7 | 45.5 | 60.0 | 73.5 |
| Pre-tax profit (£m) | (1.23) | (9.27) | (8.78) | (11.5) | 5.7 |
| Earnings per share (p) | (1.06) | (9.65) | (8.22) | (8.94) | 4.66 |
| Dividends per share (p) | - | - | - | - | 1.00 |
It provides health and fitness facilities in purpose-built gyms. The facilities include Myride indoor cycling and around-the-clock video-link pilates, yoga, dance and aerobics classes within its separate studio rooms. It offers induction and exercise program, showering and changing facilities, lockers, free group exercise classes, free in-gym music and WiFi and parking. And it offers a Fit For Work corporate scheme.
So what is The Gym Group doing that’s different from most of the rest of the industry?
Perhaps the two main standout features are that its gyms are open around the clock, 24 hours a day, 7 days a week. And there’s no annual contract. Members can terminate their membership and re-join at any time, without notice and without penalty.
It offers two types of multi-site membership, Twin and Bundle. The Twin membership allows members to access to two gyms for an additional monthly fee. The Bundle membership offers access to gyms across the nation for an additional monthly fee. It also offers student discounts to National Union of Students (NUS) Extra card holders.
In 2015, there were more than 6,300 health and fitness clubs in the UK, with around 8 million members. The penetration rate of low-cost gyms is only about 3% – but the membership of low-cost gyms is growing at a compound annual growth rate of 60% (albeit from a low base), suggesting that there is a lot of demand for the sort of flexibility that The Gym offers.
Indeed, according to a 2015 Mintel Report, the top two barriers to using health and fitness clubs (as of May 2015) were the high cost of membership fees (57% of respondents) and not wanting to be tied to a long contract (31% of respondents). So The Gym’s offering should be right up their street.
At first glance, the shares appear to be over-extended, being on an eye-watering p/e of 32 for this year. But 32 is not, of itself, high or low. It depends on the rate of earnings growth. The Gym’s rate of growth, if the forecasts (right) are correct is 24.4% this year and 27.1% next. It’s the PEGs that tell us whether the p/e ratio is excessive or not relative to its growth rates. Ideally, we like PEGs to be below 1. In this case, The Gym’s are 1.2 this year and next. That’s a little above what we like to pay, but not much.
| Year | 2015 | 2016 |
|---|---|---|
| Revenue (£m) | 90.6 | 107.3 |
| Pre-tax profit (£m) | 9.93 | 11.7 |
| Earnings per share (p) | 7.62 | 8.90 |
| Dividends per share (p) | 1.2 | 1.44 |
Furthermore, its strategy is to open 15-20 gyms a year over the medium term; effectively the cloning of a successful concept. In the case of cloning, it’s reasonably safe to look ahead further than next year. Where will earnings by in 3, 4 or 5 years. If we think that they will be a lot higher than now, then we can justify buying shares on a PEG of greater than 1 (within reason).
As with any investment, there are risks, however good the proposition seems. There doesn’t seem to be anything fundamentally wrong with The Gym Group’s business model; so perhaps the biggest danger is that the management will over-extend the company. It that case, the shares will be punished. But we’re betting that won’t happen.
BUY (212.25p; forecast yield: 0.6%; market capitalisation: £268.7 million; initial stop-loss: 408p; EPIC: GYM; sector: Hotels & Entertainment Services; classification: FTSE SmallCap; website: www.tggplc.com; tel: n/a).
We hope you enjoyed this this free share recommendation extracted from the latest edition of the premium Trendwatch newsletter…
