Equity Analysis /
Saudi Arabia

Fitness Time: Limited margin expansion leads to disappointment

    Mohamed Tomalieh
    Mohamed Tomalieh

    Associate, Equity Research Analyst

    SNB Capital
    13 May 2019
    Published by

    Fitness Time reported a weaker than expected set of Q1 19 results. Net income increased 21.1% yoy to SAR39.6mn, coming lower than NCBC estimates of SAR54.1mn. We believe the variance in earnings came from a lower than expected expansion in margins, which may be attributed to discounts and higher financing expenses.

    Fitness Time (Leejam) reported a weaker than expected set of Q1 19 results. Net income increased 21.1% yoy to SAR39.6mn. This is lower than the NCBC estimates of SAR54.1mn. Despite a strong sales growth that exceeded our estimates, a lower than expected margin expansion and higher financing expenses limited earnings growth.

    Revenues increased by 22.4% yoy to SAR217mn in Q1 19, coming higher than our estimates of SAR204mn. We believe the growth came primarily from of the aggressive expansions, specifically in female fitness centres. The company increased the female centre count from 8 in 2017 to 24 centres by 2018 and 27 in Q1 19. Total fitness centre count increased from 112 in 2017 to 123 branches in 2018 to 131 in Q1 19.

    Gross margins expanded by 175bps yoy to 34.6%. This compares to our estimates of 41.5%. We believe the weaker than expected gross margins are mainly due to seasonality and higher discounts offered at female centres. Moreover, we believe a delay in the ramp-up of new female centres and repair work to switch male centres to female centres also contributed to the limited margin expansion.

    Opex stood at SAR21.5mn (9.9% of sales) vs SAR21.2mn (11.9% of sales) in Q1 18 and our estimates of SAR23.4mn (11.5% of sales). We believe opex efficiencies despite the aggressive expansions is a key positive.

    Other expenses stood at SAR14.0mn in Q1 19 vs SAR4.3mn in Q1 18 and our estimates of SAR7mn. We believe the variance is primarily due to higher than expected financing expenses of cSAR12.9mn vs estimates of SAR5.8mn.

    We remain Overweight on Fitness Time with a PT of SAR76.6. We believe the aggressive expansions in the ladies’ fitness centres will continue to be a key earnings driver. Moreover, controlled opex despite the new store openings is another positive catalyst. The company announced a Q1 dividend of SAR0.40/share, equivalent to a pay-out of 52.3% and yield of 3.2%.