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  • Writer's pictureMark Watson-Mitchell

The Gym Group – looking for a strong AGM statement to see the shares continue to recover

The start of the year is the time to get fit!

Millions of New Year Resolutions swear that fitness is the new regime. For some, such resolutions last merely weeks, then the enthusiasm begins to wane. For others, it becomes a way of life – and the fitness revolution carries on apace.

‘Fit fans’ can pay multiple hundreds of pounds a year to be members of fitness clubs, I know this to be true because (despite my weight) I have done so at clubs in the City, where premiums are paid for exclusivity. But the machines, the facilities and the sweaty bodies are still the same.

Understandably, over the last five years or so, there has been a growing market for low-cost gyms. Going forward there is a potential for that market to broaden significantly. The upside for growth is very substantial.

That is obviously good news for low-cost gym operators in the UK – and it is very beneficial for today’s selection The Gym Group (LON:GYM).

Established way back in 2007 this company was a pioneer of the low-cost gym model and its growth to date has been ‘text-book’. Its first gym opened in Hounslow in 2008 and by the end of that year it had 7,000 members. In 2009 it had 5 clubs and 26,000 members. Those numbers doubled in 2010.

It was an engine in motion and to date it has not stopped expanding. The recently announced results for the year to end December 2018 saw the group boast of 158 clubs and a massive 724,000 members. Not only is the company an engine but it is also a ‘money machine’ too. The average revenue per member is £14.89 per month.

The group’s vision is to provide affordable access to exercise facilities and expert help to every person who wants to improve their wellbeing, whatever their starting point, whatever their destination. The clubs operate on a 24-hours a day, 7 days a week basis. They offer free group exercise classes and the help of fitness experts.

The combination of organic and acquired growth has broadened its geographic locations, whilst its technology-led business model has re-engineered the traditional gym operating model, removed costly under-used facilities and enabled it to focus on its core operations.

The low-cost appeal brings in a large membership to each club and the monthly subscription income increases exponentially. That cash generation is great news for the group’s shareholders.

By focussing on consistently improving the member experience in its gyms, growing its estate with excellent new sites and continually refining its operating model – that is obviously the recipe for delivering sustainable, profitable growth and a strong return of capital.

As a matter of interest, the company sees a ROC on its mature estate of more than 30%. It has a medium-term strategy of opening between 15 to 20 new clubs each year. Last year it opened 17 well-positioned new gyms and acquired 13 selected sites from easyGym.

Property developers and landlords are attracted by The Gym Group’s model, giving it access to the best sites available in the market. Accordingly, the company now has a large and experienced property team handling all matters to do with its expanding estate.

Just over 3 weeks ago the group announced its 2018 results and they were impressive, showing a 35.6% increase in revenue to £123.9m. Pre-tax profits of £10.0m produced earnings of 8.4p per share, amply covering a 1.3p dividend for the year.

By the end of February total membership had risen 9.5% since December to a staggering 793,000.

For the current year brokers are estimating that revenue will increase 21% to £150m, whilst pre-tax profits will double to £20m, giving earnings of 11.5p and a dividend of 1.75p per share.

For the end of the 2020 year revenue of circa £170m could see profits of £25m, some 14.5p of earnings and 2.2p of dividend per share.

The UK gym market is valued at around £4.9bn, the low-cost segment is estimated to have grown some 29% from 2014, and The Gym Group estimates that today it has some 24% of the UK low-cost gym market.

There really is a very significant headroom for future growth.

With its market-leading position and its new club opening strategy, the group will substantially increase its membership base, whilst gaining massive advantages from the economies of scale as it drives its technology, its brand and its marketing. Scale will bring strong financial returns.

With its shares at 220p the group is valued at £303m. I see them rising back up to their peak of 343p, reached in September last year, since when they have fallen back to 186p before their recovery rise after the 2018 results.

The AGM statement on 4th June just has to be bullish and, I believe, that will give the ‘recovery’ impetus more oomph.

300p is an easy 2019 Target Price.

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