Club Fitness Will Face Headwinds While Digital Trends Offer Hope

Key Takeaways

• Reliance on traditional gyms and aggressive expansion increases exposure to shifting wellness trends, market overextension, and profitability risks.
  
• Regulatory scrutiny and digital competition could drive up compliance costs and erode the competitive edge of physical club networks.
  
• Heavy reliance on acquisitions, intensifying competition, and evolving consumer trends threaten revenue growth and margin stability, while tech-driven diversification remains uncertain.

Catalysts

Operates health clubs.

• Although Viva Leisure continues to benefit from a strong societal focus on health and wellness, which underpins resilient gym membership demand and recurring revenue growth, its operational reliance on traditional club-based fitness leaves it exposed if demographic shifts lead more older consumers toward alternative, non-gym wellness services, potentially slowing future membership growth and impacting top-line revenue over the long term.
  
• While technology integration like Viva Pay, proprietary access systems, and ancillary services are expected to boost higher-margin revenue and earnings, the rapid expansion of at-home digital fitness offerings could erode the competitive advantage of Viva's physical network, putting downward pressure on both future member acquisition and average revenue per member.
  
• Despite scale advantages yielding improved procurement power and operational efficiencies, aggressive investments in new clubs and technology-even with a pivot toward network optimization-have led to elevated leverage; this poses a risk to net margins and earnings growth if acquisition integration falters or underperforming locations dilute profitability as leases come up for renewal.
  
• While the company's capital-light franchise rollout and proprietary Viva Verse tech ecosystem offer additional sources of recurring, higher-margin income, increasing regulatory scrutiny on health data privacy and biometric tech may drive up compliance and operational costs, pressuring future net earnings.
  
• Although continued urbanization and population growth in regional and suburban Australia enlarge Viva's addressable market and organic expansion runway, overextension into less-dense areas risks saturation and declining club-level profitability, which could weigh on systemwide cash flow and normalized return on invested capital moving forward.

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 8.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 2.5% today to 6.4% in 3 years time.
• The bearish analysts expect earnings to reach A$17.5 million (and earnings per share of A$0.18) by about August 2028, up from A$5.2 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 12.5x on those 2028 earnings, down from 27.9x today. This future PE is lower than the current PE for the AU Hospitality industry at 30.2x.
• Analysts expect the number of shares outstanding to decline by 2.7% 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

• The future growth of corporate-owned clubs is expected to be close to zero on a net basis as management focuses on network optimization and the potential closure of underperforming clubs as leases come up for renewal, which may stall organic revenue growth and limit expansion-driven earnings upside.
  
• High leverage and aggressive investment in acquisitions ($36.9 million in strategic acquisitions and $100.5 million in borrowings) increase the risk of financial strain or integration challenges if economic conditions worsen, potentially compressing margins and impacting net earnings.
  
• Intensifying competition from budget 24/7 fitness chains and high-volume, low-price operators selling memberships at unsustainable prices may force Viva Leisure to engage in price competition, which could erode gross margins and slow revenue growth.
  
• The shift toward technology-driven ancillary revenue streams, such as payment platforms, vending, and licensing, is promising, but the lack of clear forward guidance and the dependence on licensing agreements being signed introduces uncertainty, potentially resulting in slower-than-expected revenue diversification and growth.
  
• An ongoing shift in consumer preferences towards at-home digital fitness solutions and niche or boutique wellness models could undermine demand for traditional gym memberships in the long run, posing headwinds to membership growth and jeopardizing Viva's topline revenue if market trends pivot away from physical club offerings.

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$3.4, 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$272.6 million, earnings will come to A$17.5 million, and it would be trading on a PE ratio of 12.5x, assuming you use a discount rate of 11.5%.
  
• Given the current share price of A$1.48, the bearish analyst price target of A$1.75 is 15.1% 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.