Acquisition Risks And Disruption Will Curb Scale Yet Ensure Viability

Key Takeaways

• Rising adoption of digital and at-home fitness options, alongside demographic shifts, poses risks to traditional gym membership growth and core revenue streams.
  
• Heavy reliance on acquisitions and new business lines increases operational risks and may limit margin improvements due to regulatory, integration, and market preference challenges.
  
• Shifting from rapid expansion to asset optimization, Viva Leisure faces risks in revenue growth, cash flow, acquisition execution, technology rollout delays, and mounting digital competition.

Catalysts

Operates health clubs.

• Although growing health consciousness and urban population density underpin sustained demand for gym memberships, the accelerating adoption of digital and at-home fitness alternatives could erode Viva Leisure's traditional gym member growth and weaken expansion-led revenue over the long term.
  
• While the company has benefited from strategic acquisitions and a robust recurring revenue model, its heavy reliance on rolling up new assets exposes it to integration execution risk and the potential for overpaying, potentially limiting future margin improvement and increasing the risk of goodwill impairments.
  
• Despite Viva Leisure's emphasis on digital transformation through its proprietary tech platforms and payments division, increasing regulatory scrutiny around data privacy in Australia may drive up compliance costs, thereby constraining the net margin lift expected from these technology initiatives.
  
• Although the launch and expansion of non-traditional offerings such as vending, supplements, and digital signage open new avenues for boosting revenue per member, a rapid shift in consumer preferences towards lower-cost, at-home, or boutique fitness options could fragment market share and stunt the revenue contribution from these channels.
  
• While the capital-light franchise model and international franchise expansion promise scalable growth in recurring payments and technology fees, demographic shifts-especially an ageing population-may change fitness spending patterns and reduce the overall size of the addressable market for Viva Leisure's core gym offerings, placing longer-term pressure on both revenue and earnings trajectory.

Viva Leisure Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Viva Leisure compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Viva Leisure's revenue will grow by 18.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 2.0% today to 6.0% in 3 years time.
• The bearish analysts expect earnings to reach A$18.3 million (and earnings per share of A$0.17) by about August 2028, up from A$3.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 12.7x on those 2028 earnings, down from 36.4x today. This future PE is lower than the current PE for the AU Hospitality industry at 32.4x.
• Analysts expect the number of shares outstanding to decline by 0.73% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.53%, as per the Simply Wall St company report.

Viva Leisure Future Earnings Per Share Growth

Risks

• With a strategic pivot towards optimizing existing assets and reducing the pace of new corporate site rollouts, Viva Leisure may face slowing top-line revenue growth if it cannot drive sufficient yield improvement from mature sites and existing members, particularly as greenfield expansion historically fueled a significant portion of growth.
  
• The capital-intensive nature of opening new corporate locations-requiring one to one and a half million dollars per site-means that any resumption of an aggressive rollout strategy would increase capital requirements and could compress free cash flow and net margins if returns on investment are delayed or underperform expectations.
  
• Viva Leisure's heavy reliance on acquisitions and ongoing M&A activity to build scale exposes the company to integration challenges, the risk of overpaying for assets, and potential future impairment charges, which could negatively impact net earnings, margins and long-term return on invested capital.
  
• The planned integration of new technology and payments platforms, especially with key partners like World Gym Australia where full rollout cannot commence until 2027, means that the expected surge in high-margin recurring technology revenue is subject to significant execution risk and delay, potentially weighing on overall profitability and revenue growth over the next several years.
  
• The fitness industry continues to face long-term disruption from digital and at-home fitness solutions, which may erode traditional gym membership growth and retention; if Viva Leisure does not successfully adapt its offerings, the company could see this secular trend slow member growth and reduce recurring revenue.

Valuation

• The assumed bearish price target for Viva Leisure is A$1.75, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Viva Leisure's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$3.0, and the most bearish reporting a price target of just A$1.75.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be A$304.9 million, earnings will come to A$18.3 million, and it would be trading on a PE ratio of 12.7x, assuming you use a discount rate of 11.5%.
• Given the current share price of A$1.37, the bearish analyst price target of A$1.75 is 21.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.