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12 April 2021

Much Needed Lift for The Gym Group

Around this time last year, the fitness industry came under immense pressure as nationwide lockdowns prohibited indoor sports and limited the UK public to outdoor exercise just once per day. Not only did this hinder the progress of the fitness club industry, with estimates that market size fell from £2bn pre-Covid to £1.62bn in 2021, but also the betterment of the general populations’ health.

The first lockdown, therefore, triggered a new motivation in many of us to get fit, with uptake of the popular 5K running challenge high and home-gym equipment selling out at many online retailers. Once gyms temporarily re-opened on 4th July people began to filter back in, yet with the introduction of a tiered lockdown system and another nationwide lockdown coming in winter, motivation to unlock our true athletic potential was put to bed. Now, as gyms reopen today (12th April) in time for the Summer months, will the demand to exercise match the levels seen in the first lockdown? No doubt, the desire to exercise with a plethora of equipment in an air-conditioned gym is at the top of the list for some and should provide the fitness industry with a much-needed lift.

One UK company poised to benefit from the return is The Gym Group, which operates approximately 90 gyms across the United Kingdom that are open 24/7. The company’s position with a c.25% market share in the low-cost gym sector is likely to be advanced by the end of lockdown restrictions due to the increase in health awareness as previously mentioned. A survey found that 97% of The Gym Group’s members are eager to return to the gym, further supporting the idea that demand for gym facilities is higher now than before COVID-19.

Low-cost gym memberships have also grown at a five-year compound annual growth rate (CAGR) of 24.4% prior to the pandemic, compared to 0.5% for other private gyms and 0.1% for public gyms. If this trend resumes, the Group’s low-cost 24-hour membership puts them in a great position to attract consumers searching for the most affordable and convenient offering, away from less-able competitors that cannot provide the same service. The cost and scale associated with achieving a low-cost, yet profitable business model gives The Gym Group a competitive edge, and as membership levels have been resilient throughout lockdown, remaining above break-even levels, the Group already has a strong base to grow membership levels over the next few years.

The Group’s competitive stance allows a further opportunity to grow this membership base, as while management has limited cash burn to £5m during the pandemic, industry rivals have been less flexible. It is estimated that 20% of local authority leisure sites are unlikely to open post-pandemic, providing an opportune moment for The Gym Group to increase its footfall. Net debt is currently at £58.2m, and with its current bank facilities at £100m, there is £41.8m that could be utilised to acquire additional sites. Considering the current market has resulted in lower rental costs due to a lack of competition and greater availability of new sites, there is great potential for higher Earnings Before Interest, Taxes, Depreciation, and Amortisation (EBITDA) at these new sites. The Group is set to open four gyms in the first half of 2021, and with the demand for gym facilities set to increase over the next few years, The Gym Group should have no problem achieving return on invested capital (ROIC) above 30% which has been consistent in the past.

Please note that investments and income arising from them can fall as well as rise in value. This communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned. 
Much Needed Lift for The Gym Group

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