Low-Cost Gym Penetration And Gen Z Fitness Trends Will Sustain Steady Long-Term Momentum

Catalysts

About Gym Group

Gym Group operates a nationwide network of low cost, 24/7 gyms in the U.K., focused on a high value, no contract subscription model.

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

• Although gym penetration in the U.K. continues to rise and Gen Z participation is making fitness spend more resilient, the company is already capturing much of this demand in its existing catchments. This limits the scope for outsized membership growth and keeps revenue expansion broadly in line with mid single digit market growth.
• While data driven pricing and product add ons, such as premium features and longer term saver memberships, support modest yield gains, the need to remain clearly cheaper than mid market and match aggressive low cost competitors constrains pricing power and caps the upside to average revenue per member and EBITDA margins.
• Although the rollout pipeline is strong and white space for low cost gyms is estimated at more than ten years, returns on new sites depend on disciplined site selection and stable competitor behavior. Any missteps or local oversupply would quickly dilute ROIC and mute the contribution of new openings to earnings growth.
• Despite investments in energy optimization, labor light operations and tech systems, rising non commodity energy charges, National Living Wage, national insurance and inflation linked rents will reassert cost pressure over the medium term. This is likely to limit further expansion in site level margins and slow growth in net profit.
• While the new design aesthetic and targeted refurbishments can enhance perceived value and help fill gyms faster, this strategy draws heavily on the existing maintenance and expansionary CapEx budget. If returns from these upgrades underwhelm, free cash flow available for debt reduction or incremental growth will remain tight and constrain future earnings acceleration.

Assumptions

This narrative explores a more pessimistic perspective on Gym Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Gym Group's revenue will grow by 9.8% annually over the next 3 years.
• The bearish analysts are assuming Gym Group's profit margins will remain the same at 3.2% over the next 3 years.
• The bearish analysts expect earnings to reach £10.1 million (and earnings per share of £0.05) by about December 2028, up from £7.5 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as £14.5 million.
• 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 37.7x on those 2028 earnings, up from 34.2x today. This future PE is greater than the current PE for the GB Hospitality industry at 16.7x.
• The bearish analysts expect the number of shares outstanding to decline by 1.3% per year for 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?

• Structural growth in U.K. gym penetration, the high value low cost segment, and Gen Z treating fitness as a nonnegotiable priority could sustain high single digit revenue growth for many years. This could drive earnings expansion that supports a higher share price over time via rising revenue and EBITDA.
• Management’s data driven pricing, yield optimization, add ons such as guest passes and multi site access, and targeted marketing could unlock further average revenue per member growth beyond recent four percent gains. This could lift net margins and earnings faster than currently assumed.
• The disciplined rollout of 14 to 16 new sites per year, a decade or more of identified white space, and a targeted refurbishment program that is already filling new format gyms faster with strong returns on invested capital could materially increase total earnings power. This could put upward pressure on the share price through higher EBITDA and profit before tax.
• Continued strong free cash flow generation, self funded expansion, and leverage maintained around one times EBITDA with extended bank facilities to 2028 create optionality for future shareholder returns or accelerated growth investment. Either outcome could re rate the equity through higher earnings and an improved valuation multiple.

Valuation

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

• The assumed bearish price target for Gym Group is £1.55, which represents up to two standard deviations below the consensus price target of £1.98. This valuation is based on what can be assumed as the expectations of Gym Group'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 £2.38, and the most bearish reporting a price target of just £1.55.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be £311.4 million, earnings will come to £10.1 million, and it would be trading on a PE ratio of 37.7x, assuming you use a discount rate of 13.2%.
  
• Given the current share price of £1.43, the analyst price target of £1.55 is 7.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.