Valuing high growth companies can be tricky. The cost of establishing growth tends to drag down current earnings, making the company look expensive on straight PE grounds. For a business like The Gym Group there is an alternative: valuing it on a per gym basis, not forgetting the value of future gyms. Using this technique, we derive a value of 320p per share. Alternatively, we find that the current share price assumes a 13% discount rate needs to be applied to future cash flows.
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- Strategy: The Gym Group is a fast growing operator of low cost gyms in the UK. At the end of 2016 it had 89 gyms open. It plans to open 20 in 2017 and it has just announced the acquisition of a further 18 gyms from Lifestyle Fitness.
- Low cost growth: The growth in the UK fitness market is coming from the low cost sector with membership at both traditional private clubs and publicly run facilities largely static. Of the total 6,700+ gyms in the UK fewer than 550 are “low cost”, where membership typically costs less than £20 per month.
- Gym efficiency: The Gym Group opened its first site in 2008 and has become the second largest player in the low cost segment to Pure Gym. It costs Gym group slightly less than £1.5m to open a new gym that should generate £405k of EBITDA in its third year. The company targets a ROCE in excess of 30%.
- Risks: In addition to generic corporate risks, the main threat that the Gym Group faces is, we believe, competition. There are many players in this market and the barriers to entry are not high but The Gym Group is an impressive operator that has honed its operations very efficiently.
- Investment summary: This is not a full report on The Gym Group and it is not a client of Hardman and Co. but we believe it is an interesting example of a company that benefits from looking at its valuation in a non-traditional way and where the valuation on a per outlet basis is particularly appropriate.