Strategy Note /
Saudi Arabia

Fitness Time | Q4 Update | Strong earnings recovery

  • Leejam's expansion plans have resumed after a brief pause during the Covid-19 period

  • Pressure on margins driven by wage inflation and higher discount

  • Strong cash generation and attractive dividend payout

SNB Capital
13 December 2022
Published bySNB Capital

We remain Overweight on Fitness Time with a revised PT of SAR107.9. Aggressive expansion plans and strong recovery in active memberships are expected to drive revenues. However, wage increases and new centres cost will keep margins under pressure. We expect revenue and net profit to grow by CAGR of 12.2% and 12.1% during 2021-24f to reach SAR1.25bn and SAR290mn, respectively. The stock is trading at a 2023f P/E of 16.1x, significantly lower than the peers average of 24.7x, which we believe is not justified.

  • Aggressive expansion and membership growth: Leejam's expansion plans have resumed after a brief pause during the Covid-19 period. The company opened 13 new centres during 9M 22 and is on course to open another 2 centres by the end of 2022f. After recording a contraction in Q2 22, total active memberships have started to recover and reached 367,000 at the end of Q3 22. Over the medium term the management aims to reach 500,000 active memberships by 2025f (2021-2025f CAGR of 14.4%) based on expansion plan of both big box and small format centres to reach 211 (from 145 in 2021). However, we remain conservative in our estimates and expect the company’s membership count to grow by 11.0% CAGR during the 2021-25f period to reach c443,700 active members.

  • Pressure on margins driven by wage inflation and higher discount: Leejam’s margins has come under pressure (9M 22 GM of 37.2% vs 39.7% in 9M 21) which we believe is due to 1) higher discounts offered for customer acquisitions and 2) higher wages and costs associated with opening new centres. However, the management indicated that margins will return to 2019 levels of c38%. Hence, we have adjusted our GM assumption to 38.4% and 38.1% in 2023f and 2024f, lower than our previous estimates of 41.9% and 41.4%, respectively. We highlight that the company’s cost control initiatives (lower employee per centre) and increasing subscriptions through online channels provide upside risk to our margin assumptions.

  • Strong cash generation and attractive dividend payout: Driven by the expansion plans, we project Leejam’s revenue and net profit to deliver a CAGR of 12.2% and 12.1% during 2021-24f to reach SAR12.5bn and SAR290mn, respectively. Despite the anticipated margin compression, we believe the company’s cash generation ability remain intact with a FCF of SAR1.3bn over the next 5 years. We believe this will allow it to maintain a dividend payout ratio of 55-60% during 2022f-24f, translating into a dividend yield of 3.6% and 4.1% in 2023f and 2024f, respectively.

  • Remain Overweight with a revised PT of SAR107.9: We maintain our Overweight rating on Fitness Time with a revised PT of SAR107.9. We believe the aggressive centre expansions and strong memberships growth are the key stock drivers going forward. The stock trades at 2023f P/E of 16.1x, significantly lower than the peer group average of 24.7x which we believe is not justified.