Experience-Led Leisure And Industry Consolidation Will Drive Long-Term Earnings Power

Catalysts

About XP Factory

XP Factory operates UK leisure venues under the Escape Hunt and Boom Battle Bar brands, offering immersive escape rooms and competitive socialising experiences.

What are the underlying business or industry changes driving this perspective?

• Industry consolidation in escape rooms and competitive socialising is reducing undercapitalised, hobbyist operators. This is allowing XP Factory to capture share in prime locations and sustain high site EBITDA margins above 40% and group earnings growth.
• Shifts in consumer behaviour toward experience led leisure for families, friends and corporates are expanding the addressable market for both brands. This is supporting like for like sales growth and higher group revenue over time.
• Consistently high customer satisfaction scores near 98% across review platforms underpin strong repeat visitation and word of mouth. This should improve revenue quality and support resilient net margins even in a softer macro environment.
• Operational gearing from a largely fixed central cost base, now trending down toward target ratios, means incremental site openings and maturing venues should increasingly flow through to EBITDA, lifting earnings faster than revenue.
• Disciplined rollout focused on high returning sites, with returns on capital above 50 percent and pre purchased modular games that shorten build times, enables capital light growth that should enhance free cash flow and support deleveraging and potential shareholder returns.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming XP Factory's revenue will grow by 13.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from -2.2% today to 4.6% in 3 years time.
• Analysts expect earnings to reach £3.9 million (and earnings per share of £0.02) by about December 2028, up from £-1.3 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 20.8x on those 2028 earnings, up from -15.8x today. This future PE is greater than the current PE for the GB Hospitality industry at 16.7x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.19%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• XP Factory’s leisure formats depend on indoor, discretionary spending, and management has already seen how unusually hot, dry weather and softer macro conditions can push like for like sales into negative territory. If milder winters or hotter summers become the new normal and consumers remain pressured, revenue growth could fall short of expectations and squeeze EBITDA margins.
• The strategy assumes a long runway of high returning UK sites. However, both escape rooms and competitive socialising are maturing, with industry growth already slowing and supply contracting. This means that if prime locations become scarcer or new concepts such as action game arenas capture demand, site economics could deteriorate and drag on group earnings.
• Wage inflation, higher national insurance and rising living wage have already pressured costs at site level. If labour and utility costs continue to outpace XP Factory’s ability to lift prices or improve efficiencies, the currently strong site EBITDA margins above 40% in Escape Hunt and trending 20% targets in Boom could erode, reducing net margins.
• The plan to double Escape Hunt and add a third to Boom by 2028 relies on disciplined rollout and leverage of a largely fixed central cost base. If weaker trading or tighter credit conditions limit access to the revolving facility or force a slower expansion, operational gearing could work in reverse and weigh on cash generation, constraining free cash flow and earnings growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of £0.32 for XP Factory based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be £84.5 million, earnings will come to £3.9 million, and it would be trading on a PE ratio of 20.8x, assuming you use a discount rate of 13.2%.
  
• Given the current share price of £0.11, the analyst price target of £0.32 is 64.8% 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.