Fitness Time reported a strong set of Q3 22 results, with a net income of SAR68.1mn. Although net income declined by -10.7% yoy (+88.9% qoq), it was higher than the SNB Capital and consensus estimates of SAR52.7mn and SAR59mn, respectively. Revenues increased by 4.2% yoy (+13.5% qoq) to SAR264mn, but came slightly lower than our estimates of SAR274mn. The variance was primarily driven by 1) higher than expected gross margins which stood at 40.5% vs our estimates of 35.0%, 2) a decline in opex which stood at SAR24.9mn vs our estimate of SAR29.5mn due to lower G&A expenses.
Revenue increased by 4.2% yoy (+13.5% qoq) to SAR264mn, but was slightly lower than our estimates of SAR274mn. The yoy increase in revenue was mainly due to addition of new stores and strong growth in memberships. Total membership increased to 367,000 in Q3 22, the highest level on record, and compared to 274,000 in Q2 22. Recovery in memberships is a key positive of the results following to weak levels reported in the last two quarters.
The total gyms stood at 153 (including 25 Xpress gyms) at the end of Q3 22 vs 141 in Q3 21 and 151 in Q2 22. Accordingly, LFL stood at -4.3% yoy.
Gross margins contracted significantly to 40.5% vs 50.6% (46.2% after adjusting for one-off rent concessions) in Q3 21. However, it came higher than our estimates of 35.0% and 33.5% in Q2 22. Recovery in margins is another positive of the results as weak margins in the previous two quarters negatively impacted profitability. We await detail financial to have a better understanding on the main drivers of margin recovery.
Operating expenses in absolute terms decreased by 35.7% yoy to SAR24.9mn and came lower than our estimates of SAR29.5mn. Opex-to-sales decreased to 9.4% vs 15.3% of Q3 21 and our estimates of 10.8%. We believe the variance in opex is mainly due to lower G&A expenses.
Non-operating expenses stood at SAR14.2mn (+5.1% yoy), in-line with our estimate of SAR13.9mn. We believe the yoy increase was mainly driven by an increase in finance costs due to higher interest rates.
Based on our last update published, we are Overweight on Fitness Time with a PT of SAR132.4. We await detail accounts to update our PT and estimates. Revenue growth and lower opex are the key positives of the results. We believe the company’s outlook remains positive driven by growth in active memberships, centre expansions and increasing PT revenue. The stock is trading at a 2023f P/E and EV/EBITDA of 10.5x and 5.9x compared to the peer group average of 18.1x and 10.6x, respectively.