100 New Clubs And Franchising Will Open European Markets

Key Takeaways

• Basic-Fit's expansion strategy and 24/7 club operations are expected to boost membership and drive revenue growth in key European markets.
  
• Strategic financial moves, including capital-efficient strategies and franchising, aim to enhance shareholder value and strengthen company profitability.
  
• Rising operational costs and strategic delays could hinder profitability and revenue growth, while reliance on membership and club expansion remains vulnerable to market conditions.

Catalysts

Engages in the operation of fitness clubs.

• Basic-Fit is planning to open around 100 new clubs in both 2025 and 2026, which could drive future revenue growth through increased membership, especially in key markets like France, Spain, and Germany.
  
• The increase in accessibility, with 333 clubs in France transitioning to 24/7 staffing despite higher costs, is expected to boost membership numbers and ultimately improve revenue and net margins by 2026 as benefits from increased memberships are realized.
  
• The implementation of a more capital-efficient strategy, which includes launching a €40 million share repurchase program, is anticipated to enhance shareholder value and improve earnings per share.
  
• Basic-Fit's move towards franchising, with concrete steps to be announced in the second half of 2025, may provide a new revenue stream and contribute to company growth and increased profitability long-term.
  
• The strategic goal to decrease the net debt-to-adjusted EBITDA ratio to below 2x by 2026 implies a stronger financial position that could lead to increased investment capacity and improved net margins through reduced interest expenses.

Basic-Fit Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Basic-Fit's revenue will grow by 12.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.7% today to 8.3% in 3 years time.
• Analysts expect earnings to reach €142.8 million (and earnings per share of €2.0) by about April 2028, up from €8.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €177 million in earnings, and the most bearish expecting €107 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.3x on those 2028 earnings, down from 153.2x today. This future PE is lower than the current PE for the GB Hospitality industry at 77.7x.
• Analysts expect the number of shares outstanding to decline by 0.19% per year for 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

• Increasing operational costs, especially in France due to the need for staffed 24/7 clubs, could negatively affect net margins and delay profitability improvements.
  
• The delay in implementing the franchise model adds uncertainty and might postpone additional revenue streams from this strategy, impacting future earnings growth.
  
• The €35 million additional annual cost for 24/7 operations might not be immediately offset by additional membership income, which could suppress net profit margins in the short term.
  
• The significant capital allocation to share buybacks might signal a slowdown in expansion, potentially hindering long-term revenue growth and increasing the risk of competitive market encroachment.
  
• A significant portion of their growth strategy relies on membership increases and club openings, which are subject to market conditions and economic factors, potentially impacting revenue growth projections.

Valuation

• The analysts have a consensus price target of €26.867 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 €19.8.
• 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 €142.8 million, and it would be trading on a PE ratio of 16.3x, assuming you use a discount rate of 10.0%.
• Given the current share price of €18.61, the analyst price target of €26.87 is 30.7% 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.