Expanding Club Network Will Reach 1,575 Locations By Year-End

Key Takeaways

• Rapid club network expansion and strong membership growth, particularly in Spain, drive revenue growth and strengthen Basic-Fit's top line.
  
• Pricing and franchise strategy adjustments aim to boost per-member revenue, enhance scalability, and improve margins while enhancing member retention.
  
• Strategic changes in pricing and franchise models introduce risks to revenue and margins, compounded by potential regulatory impacts and shareholder dissent.

Catalysts

Engages in the operation of fitness clubs.

• Basic-Fit is expanding its club network at a rapid pace, adding 168 clubs in the first nine months of the year and expecting to reach around 1,575 clubs by year-end. This expansion is likely to drive further revenue growth and contribute to the company's top line as the new and acquired clubs ramp up operations.
  
• The company is seeing strong membership growth of 13% year-on-year, with significant increases in the Spanish market following recent acquisitions. This growing membership base is set to support continued revenue growth as more members equate to higher subscription revenues.
  
• Basic-Fit is testing new pricing strategies, including weekly pricing and slight increases in membership fees in France. Successfully implementing this strategy could increase average revenue per member, positively impacting revenue and potentially improving net margins if operational efficiencies are realized.
  
• The launch of a franchise model is expected to commence with the first franchise clubs opening in 2025. This initiative allows for expansion into new countries with limited capital investment, potentially increasing revenue streams and improving return on invested capital due to the scalability and reach of the franchise model.
  
• Basic-Fit's initiatives in club enhancements, such as extending opening hours, introducing massage chairs, and optimizing pricing strategies, are expected to enhance the member experience and retention, which could lead to a more stable membership base and improve earnings through added value and retention of higher-tier memberships.

Basic-Fit Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Basic-Fit's revenue will grow by 15.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.7% today to 10.8% in 3 years time.
• Analysts expect earnings to reach €188.4 million (and earnings per share of €2.07) by about February 2028, up from €7.6 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 14.5x on those 2028 earnings, down from 194.3x today. This future PE is lower than the current PE for the GB Hospitality industry at 98.3x.
• 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 9.98%, as per the Simply Wall St company report.

Basic-Fit Future Earnings Per Share Growth

Risks

• The strategic reintroduction of lower-priced memberships in France and the slight decrease in expected average revenue per member could impact overall revenue targets negatively if not counterbalanced by sufficient membership growth.
  
• The introduction of a new franchise model, although promising for expansion, carries execution risk and could potentially lead to inconsistent brand experience or profitability if not carefully managed, impacting future earnings.
  
• Any adverse effect on membership yield due to pricing changes in France could jeopardize future revenue and net margins, particularly if similar price structures are implemented in other markets.
  
• The potential VAT increases in countries like the Netherlands could lower net margins unless passed on to consumers, which might not be feasible without impacting membership growth.
  
• The recent activist shareholder activity suggests possible unrest or disagreement on company strategy, which could lead to financial instability or changes in strategic direction that could affect long-term revenue and profitability projections.

Valuation

• The analysts have a consensus price target of €31.1 for Basic-Fit 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 €36.0, and the most bearish reporting a price target of just €24.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €1.7 billion, earnings will come to €188.4 million, and it would be trading on a PE ratio of 14.5x, assuming you use a discount rate of 10.0%.
  
• Given the current share price of €22.44, the analyst price target of €31.1 is 27.8% 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.