Low-cost leisure operator The Gym Group (GYM) gives up some of yesterday’s gains after rubbishing press reports that it was going to buy 70 sites from rival company Fitness First. This speculation fuelled a 13% rally in the share price on 30 August 2016.

Chief executive John Treharne says the company’s principle growth strategy is to expand organically. However, he adds the business would consider acquisitions and says four sites were recently purchased from an undisclosed competitor.

The 3% share price decline to 222.5p would suggest half year results published today (31 August 2016) are disappointing, which is not the case. Earnings are slightly better than forecast by analysts and the company has declared a maiden dividend of 0.25p per share.

Average revenue per month increased by 1.6% to £14.31 which Treharne says has been driven partly by new sites reaching maturity. It has opened 25 new gyms since December 2014 and now has 80 operational sites.

While the price ticket is fairly low, the company’s gyms can become incredibly profitable. This is central to the investment case. Read our recent Griller article to understand how the business operates and the growth opportunities on offer.

‘We have 3,000 registered members for a gym by the time it opens. This rises to 6,000 average members over the following 18 to 24 months,’ says the CEO. ‘Gyms achieve in excess of 30% return on capital by the end of the second year. The gyms move to profitability very quickly; on average they are cash break-even within three months of opening.’

Manager bonuses are based on the profitability of each gym, so they are always looking to test if prices can be pushed upwards without having a negative impact on demand.

The company is also exploring ways in which to drive up ancillary revenues, being income derived from anything that is not monthly membership fees.

‘We have more than 3 million people on our active database which is something we are looking to monetise,’ says Treharne. ‘It will be a gradual process and it is the reason why we have hired Barney Harrison from Sky (SKY) as marketing director.

‘Fundamentally this project will be online. It could involve (selling) retail products.’ Interestingly, The Gym Group already sells protein products to customers.

‘The main focus will be member engagement, such as monitoring their exercise and be able to offer additional services to them,’ says the CEO.

Numis forecasts The Gym Group will make £9.2 million pre-tax profit in 2016, rising to £13.2 million in 2017. ‘We are encouraged by today's interims and Gym's strong trading momentum,’ says analyst Wyn Ellis.

‘Structural growth opportunities for low-cost gym operators (where Gym Group is the strong market No.2) continue to be very promising, in our view.

'If the consumer environment was to deteriorate post-Brexit we believe the Group is well placed for increased demand from customers trading down from more expensive gyms.’

Issue Date: 31 Aug 2016