Digital Transformation And Rising Health Consciousness Will Drive Expansion

Key Takeaways

• Rapid franchise and technology expansion, combined with operational efficiencies and platform integrations, position Viva for outsized recurring revenue and margin growth beyond current forecasts.
  
• Viva's multi-brand, data-driven strategy and industry consolidation focus enable it to capitalize on health trends, build resilient membership, and drive long-term earnings acceleration.
  
• Aggressive expansion, rising debt, industry shifts toward digital fitness, and cost pressures could compress margins and hinder revenue growth amid heightened competition and strategic club closures.

Catalysts

Operates health clubs.

• Analyst consensus sees franchise network expansion driving incremental recurring revenue, but the magnitude is likely understated; with 170+ franchises already secured and a demonstrated track record of bringing locations to market rapidly, the sheer pace and scale of openings-combined with bundled tech/payments solutions-could deliver a step-change in Viva's top-line growth and franchise royalty income, far exceeding current earnings forecasts.
  
• Analysts broadly agree that the rollout of high-margin technology and payments will lift margins, but the upcoming licensing of proprietary solutions to third-party operators globally, expansion of Viva Pay across more brands, and network effects from Digital Signage/Radio/Apps have the potential to unlock a multi-year, exponential margin expansion and create a large, recurring software and services revenue stream that could eventually surpass traditional club profitability.
  
• Viva's scale, multi-brand strategy, and data-centric network place it at the forefront to capitalize on strong long-term shifts towards health, wellness, and preventive living; the company is not just benefiting passively, but actively converting a growing, younger, health-conscious member base into lifelong customers, driving long-term membership ARPU growth and exceptionally resilient recurring revenue.
  
• Underappreciated operational leverage exists from network optimization and AI-driven efficiencies; as underperforming locations are rationalized, lease costs drop, and club-level ROI is boosted-paired with smart deployment of capital-resulting in rapid net margin expansion and significant acceleration in free cash flow generation.
  
• Viva is uniquely positioned as the preferred consolidator in a highly fragmented Australian and Asian fitness market, with a proven track record of disciplined M&A and platform integration; attractive acquisition opportunities during periods of industry stress could be immediately accretive, allowing Viva to further accelerate earnings and strengthen its platform far faster than consensus expects.

Viva Leisure Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Viva Leisure compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Viva Leisure's revenue will grow by 11.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 2.5% today to 8.3% in 3 years time.
• The bullish analysts expect earnings to reach A$24.1 million (and earnings per share of A$0.25) 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 bullish analyst cohort, the company would need to trade at a PE ratio of 18.0x on those 2028 earnings, down from 27.1x today. This future PE is lower than the current PE for the AU Hospitality industry at 29.7x.
• Analysts expect the number of shares outstanding to decline by 1.99% 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

• Aggressive expansion through acquisitions and greenfield sites has resulted in a significant increase in borrowings, with debt rising to $100.5 million from $60.6 million in just one year, exposing Viva Leisure to higher interest costs and potential strain on free cash flow and net profit if integration or acquired club performance falls short.
  
• The transition in strategy from network expansion to optimization, including planned closures and consolidations of underperforming clubs as leases expire, could mask stagnant or declining organic growth, reducing future revenue growth rates and possibly compressing operating margins if churn or competition increases.
  
• The rapid growth of digital and at-home fitness trends presents a structural risk as consumer preferences shift away from traditional gyms, potentially decreasing demand for physical memberships and negatively impacting both top-line revenue and long-term member retention.
  
• Heightened competition from low-cost, 24/7 gym chains and boutique studios, combined with aggressive price-based strategies in parts of the market, may trigger pricing pressures and higher promotional activity, which could erode Viva Leisure's net margins and limit its ability to pass on price increases.
  
• Sustained inflation in labor, rent, and compliance costs-along with greater regulatory scrutiny-could lead to rising operating expenses across the fixed asset-heavy club base, placing downward pressure on net margins and earnings, particularly given the company's commitment to technology and club reinvestment capital expenditure.

Valuation

• The assumed bullish price target for Viva Leisure is A$3.4, which is the highest 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 bullish 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 bullish analysts, you'd need to believe that by 2028, revenues will be A$289.5 million, earnings will come to A$24.1 million, and it would be trading on a PE ratio of 18.0x, assuming you use a discount rate of 11.5%.
• Given the current share price of A$1.44, the bullish analyst price target of A$3.4 is 57.6% 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.