Gym Group (GYM) 131.56p

Loss to date: 4.5%

In July 2024, we highlighted low-cost gym operator Gym Group (GYM) as a good risk/reward investment based on increasing like-for-like sales momentum and improving returns on investment.

This has allowed the company to increase the rate of site expansion using internally-generated cashflow and to target 50 new sites over the next three years.

WHAT HAS HAPPENED SINCE WE SAID TO BUY?

As recently as November 2024 the shares were showing a 23% gain, but they have subsequently drifted back below our purchase price.

The fall in the share price is at odds with what has happened in the business given that at the first-half results last September the company raised its full-year profit guidance to the top end of market forecasts.

Earlier this month, the group posted full-year profit ahead of consensus expectations, with adjusted EBITDA (earnings before interest, tax, depreciation, and amortisation) less normalised rent up 24% to £47.7 million and free cash flow up 39% to £37.5 million.

The group also raised its guidance for 2025 to the top end of its previously upgraded range thanks to strong trading since the start of the year.

Strong cash flow reflects revenue growth and increased returns on invested capital, with the business achieving its 25% target earlier than expected, up from 21% the prior year, allowing it to increase new site openings to between 14 and 16 this year from 12 in 2024.

‘With significant white space opportunity suggesting a decade of roll-out potential, we are accelerating our self-funded roll-out of circa 50 sites over three years that are expected to deliver an average 30% return on invested capital,’ the company said.

WHAT SHOULD INVESTORS DO NOW?

Share prices rarely move in straight lines, but eventually they follow growth in profits and patience is needed to stay the course.

With new sites said to be trading well and earning a 30% return on capital, we believe profitable growth should create greater shareholder value over time. 

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