Equity Analysis /
Saudi Arabia

Fitness Time: Q2 20 - Headwinds, recovery, and growth for Leejam

  • As part of the efforts to stop the spread of COVID-19, all fitness centres were closed at the end March 2020

  • As part of the new normal, we believe members could be cautious in returning to fitness centres.

  • We lower our 2020f and 2021f revenue estimates by -41.0% and -25.8% respectively.

SNB Capital
13 August 2020
Published bySNB Capital

We revisit our valuations to incorporate the impact of COVID-19 on the fitness industry. We expect the recovery to be gradual rather than immediate, which is expected to impact volume growth and pricing power in the near term. However, Leejam’s long term prospects remain strong, as it is in a unique position to benefit from Saudi’s transition to a healthier lifestyle. Continued female gyms expansion and personal training should be major revenue drivers, while cost control will also support profitability growth. We lower our TP to SAR72.3, but retain an Overweight rating on the stock. The company trades a 2021f PE of 24.5x vs global peers average PE of 18.3x.

Q2 20, the lost quarter due to lockdown: As part of the efforts to stop the spread of COVID-19, all fitness centres were closed at the end March 2020 and were only allowed to reopen at the end June 2020, with strict social distancing measures in place. Subsequently, the company froze all existing member subscriptions and paused taking new subscriptions during the lockdown period.

Covid-19: medium-term impact on the fitness industry: As part of the new normal, we believe members could be cautious in returning to fitness centres. We also believe the recent fiscal measures will impact volumes growth. Hence, volume recovery would be more gradual, with short term pressure on pricing power. We have assumed member/gym to decline from 2,144 members in 2019 to 1,807 in 2020f, before recovering to 1,871 by 2022f.  Similarly, we expect the company to give discounts to improve centre utilization rates, with revenue/subscriber expected to decline from SAR2,987 in 2019 to SAR2,091 in 2020f and then recover to SAR2,517 in 2021f.

Revenue recovery to start beyond 2021f: We lower our 2020f and 2021f revenue estimates by -41.0% and -25.8% respectively, to reflect our view of a more gradual recovery. We have lowered our estimates for revenue/subscriber, given the impact of lost Q2 20 revenue and the spill-over effect on subsequent quarters. We have also been slightly more cautious in our estimates for subscribers/gym. Overall, we expect the company’s revenue to decrease by c37% yoy to SAR595mn in 2020f, before recovering to SAR830mn in 2021f (albeit still 11.9% lower than 2019f levels). Overall, we expect the company to deliver a 5-year revenue CAGR of 6.8% (vs 9.9% from our previous estimates).

Remain Overweight on future recovery: We remain overweight on Fitness Time with a revised PT of SAR72.3. We believe in Fitness Time’s ability to recover from the current headwinds followed by a strong growth outlook, supported by the expansion of female gyms and growth of personal training revenues.