Berenberg sees upside risk to profits at Gym Group

by | Sep 20, 2023

(Sharecast News) – Berenberg has reiterated its ‘hold’ rating on Gym Group after the company’s positive interim results last week, but said that some upside risk to forecasts remains this year.
“While we think that there is an opportunity for a recovery, we are still waiting to see how the company navigates its pricing increases and cost base amid a challenging backdrop,” the broker said.

First-half results from the 24/7 low-cost fitness chain operator on 13 September were in line with expectations following a trading update in July, but Berenberg highlighted a number of noteworthy positive details.

There was a 15.4% increase in Gym Group’s app downloads during the half, which is positive for potential pricing and membership growth. The company also trialled a three-tier pricing system in a third of its gyms which is said to be progressing well. Meanwhile, gym visits totalled 32m during the period, up 20% on the first half of last year, which equates to 11% more visits per gym, Berenberg pointed out.

“The more customers that see this value, the more likely they are to retain membership if there are further price increases. More detail will likely be provided in November. If Gym Group is able to give clear guidance on how pricing is being used to drive revenue, it would provide us with greater confidence in increasing our estimates.”

Nevertheless, with the company guiding to flat EBITDA growth over the full year – as revenue growth is outweighed by high cost inflation – forecasts could potentially be beaten, according to Berenberg.

“Though cost inflation has been persistent, we are seeing signs of it easing. With the level of operational gearing in the business, once these costs pressures start to come off, this will drop down to the bottom line. When more favourable hedges start to come into play, there should be room for some solid EBITDA improvements.”

The stock was up 0.4% at 115.6p, in line with Berenberg’s 115p target price.

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