Franchise Expansion And Tech Integration Will Optimize Future Cash Flows

Key Takeaways

• Franchise network expansion and high-margin segments are set to drive revenue growth, enhancing scalability, profitability, and earnings for Viva Leisure.
  
• Strategic focus on capital-light models and international expansion aims to improve cash flow, brand recognition, and revenue growth.
  
• Economic and financial challenges, including inflation, capital needs, and transition risks, could impact membership, revenue stability, and margins for Viva Leisure.

Catalysts

Operates health clubs.

• Viva Leisure's franchise network expansion is expected to drive future growth, with 118 secured and upcoming locations that will increase franchise fees, payments, technology fees, and enhance recurring revenue scalability and profitability. This impacts revenue and earnings growth.
  
• The rollout of high-margin segments like the Technology and Payments division is anticipated to be the fastest-growing area of Viva's business, driven by partnerships and integration into new franchise networks. This is expected to boost margins and earnings.
  
• The strategic pivot towards optimizing cash flow by focusing on existing networks and a capital-light franchise model over opening new greenfield sites will increase free cash flow availability, contributing to better capital management and potentially higher net margins.
  
• International expansion plans, such as new territories in Singapore, Hong Kong, the Philippines, and the UK for the Plus Fitness brand, are poised to extend the market reach, increasing global brand recognition, and driving top-line revenue growth.
  
• The integration of new tech and revenue streams, like Viva Pay and unified access apps, alongside the expansion of the vending and digital signage network, promises to enhance high-margin recurring revenue streams and support stronger net margins in the future.

Viva Leisure Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Viva Leisure's revenue will grow by 16.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.0% today to 5.4% in 3 years time.
• Analysts expect earnings to reach A$15.3 million (and earnings per share of A$0.15) by about July 2028, up from A$3.7 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.7x on those 2028 earnings, down from 33.7x today. This future PE is lower than the current PE for the AU Hospitality industry at 32.9x.
• 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 11.61%, as per the Simply Wall St company report.

Viva Leisure Future Earnings Per Share Growth

Risks

• Rising inflation and interest rates are mentioned as economic challenges, which could impact consumer discretionary spending, potentially affecting membership growth and thereby impacting revenue.
  
• The significant capital required for expanding corporate-owned locations could strain financial resources, potentially affecting free cash flows and net margins.
  
• Cancellation of rebates from a third-party payments provider replaced by high-margin Viva Pay suggests past reliance on lower-margin revenue streams; the transition carries risks impacting net margins.
  
• Heavy reliance on recurring revenue for stability (over 90%) may not provide flexibility in downturns, potentially affecting earnings if there are significant membership declines.
  
• The company's strategic investments in franchises involve risks associated with new market entries and executing international expansions, which could impact expected revenue growth and profitability.

Valuation

• The analysts have a consensus price target of A$2.375 for Viva Leisure based on their expectations of its future earnings growth, profit margins and other risk factors. 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 analyst's consensus, you'd need to believe that by 2028, revenues will be A$285.8 million, earnings will come to A$15.3 million, and it would be trading on a PE ratio of 20.7x, assuming you use a discount rate of 11.6%.
• Given the current share price of A$1.26, the analyst price target of A$2.38 is 46.7% 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.