Founder led, tech focused, spits cash, strong growth, and on a single digit multiple? What stock are we talking about?

This week we spotlight a recent IPO that has gone completely under the radar yet meets all the criteria we look for in a business. The company is founder led, generates over 90% recurring revenue, is growing strongly, and yet is trading on a single digit multiple. Our current valuation sits at almost double the current trading price. To find out more, continue reading.

Viva Leisure (VVA.ASX) is a regional health club operator in Australia. The company operates over forty clubs, mostly in regional towns and mainly under the brand Club Lime and Hiit Republic. VVA’s key differentiator amongst its competitors is their tailoring of each club to the relevant demographics and a technology driven approach like no other.

VVA ticks all the boxes for the kind of business we are looking for:

• Founder led, with the MD, Harry Konstantinou, and his family owning 50% of the company. They have not sold any shares at IPO either.
• Recurring and predictable revenue with all members signed up to a fortnightly direct debit plan.
• Exposed to the Health and fitness sector which is less impacted by general economic downturns.
• Technology and data driven business leading to industry best profit margins.
• Strong free cash flow generation.
• Estimated to grow at 30% p.a. for the next three years.
• Trading on a single digit forward multiple.

Source: Company filings

In our mind VVA is a technology company that is operating fitness clubs. The founders have all come from successful IT and technology businesses in the past. Member and club occupancy and visitations are tracked on an hourly basis enabling the company to manage each location occupancy levels and cost base. This data also allows management to reduce churn by targeting members whose frequency of attendance has declined.

The company, with its internal team of developers, is capable of developing and launching new and innovative services for members that no other competitor can. These include a fully automated sign up process online with no need for staff interaction, online member dashboards to manage club visitation times, a mobile ID app that allows access into facilities by tapping your phone and much more.

The above has enabled VVA to grow and maintain a low churn in its member base. VVA has achieved EBITDA margins of 40% per club and 25% for the group in FY19. These are best of breed margins for not just Australia but anywhere in the world.

Source: Company filings

VVA’s main brand is their Club Lime fitness centres but they have also launched Hiit Republic. This is their own version of F45, the popular high intensity interval training chain.

VVA’s “hub and spoke” approach to each area they operate in is also a unique approach in the industry. When VVA enters a new area, it opens a large club and, as occupancy levels reach the target level of two members per square meter, further smaller locations are open in the nearby vicinity with each one having a slightly different offering. This provides more flexibility for members and reduces member congestion in peak hours.

Source: Company filings

From a financial and growth perspective, VVA is an exciting proposition for investors. Not only has VVA beaten all prospectus forecasts so far but their growth is accelerating much faster than expected. The company has forty-two operating locations and has secured a further eleven more to open in FY20. The company has a target of opening 15-20 new locations per annum for the next 3-5 years. Typical club breaks even within 4-6 weeks from launch.

Additionally, the company’s IPO proceeds have provided them with a strong balance sheet in possession of $14m in net cash to fund acquisitions at 3-4x EBITDA multiples. There are currently 24 targets in the pipeline which could deliver significant further growth in the year ahead - watch this space.

VVA currently has 57,000 members with each one paying on average $16 per week. The company is, on average, adding 1,300 members per month. We estimate FY20 to see an average of 63,000 members growing to 77,000 in FY21. Based on this we expect FY20 revenues of $53m growing to $64m in FY21. EBITDA margins should exceed 25% for the group and over time head towards 30%.

Source: Company filings

Based on the above and excluding the new AASB16 lease accounting changes, we expect EBITDA to reach approximately $13m this year and $17m in FY21. The current EV is $56m which places VVA on a 3.8x FY21 multiple. On an EPS level we expect 12.5 cents EPS this year growing to 17 cents in FY21, which places VVA on a 8.5x PE multiple. This is exceptional value.

Domestic Health and Leisure companies are trading on 8x EV multiples with earnings growth of 10% compared to VVA growing at 30%. We expect acquisitions to present upside risk to these forecasts. 

VVA is a high quality, cash generative business that is technology focused and driven, yet completely overlooked by the wider investor community. We value VVA at approximately $2.60 (80% upside) and it is currently one of our larger holdings in the TAMIM All Cap IMA portfolios.