Investing in small-cap stocks during an economic recession can be challenging due to their high volatility, which leads to deeper downturns compared to larger companies. We recently discussed that tough times offer opportunities for patient investors in the small cap space and TAMIM portfolio manager Ron Shamgar believes that one holding currently has the potential for significant upside in the face of a potential recession. Some industries tend to experience relatively steady demand in both good times and bad. That makes them fairly recession-resistant. One of the areas that is becoming increasingly important to consumers is personal wellness, and Viva Leisure (ASX: VVA) is well-positioned to capitalise on this trend. The businessViva Leisure owns several brands, including its flagship Club Lime, Pinnacle Health Clubs, Fit n Fast, HIIT Republic, and Plus Fitness. Since fully reopening post-COVID, the Company has been in expansion mode with the opening of its second corporate Plus Fitness site location in Glebe, Sydney, and the acquisition of Plus Fitness Hocking in Western Australia. The company is also building greenfield sites and continually rolling out new locations. Around 88% of Viva's revenue is recurring, and the Company believes their client base is “sticky” because of what the gym provides is an “experience”. The Company has recently conducted an independent survey of its Club Lime members through Roy Morgan. The survey focused on various topics related to their lifestyle, including the perceived value of their health club membership. Notably, the survey found that 67% of Club Lime members consider their gym membership a necessity rather than a luxury. Additionally, 80% of respondents believe that their membership would help them save on future costs associated with ageing and illness. The survey also shed light on the primary reasons why Club Lime members engage in health activities, with 71% of respondents citing mental wellbeing as the main motivator. These findings underline the importance of Viva Leisure's offerings in promoting holistic health and wellbeing, with a focus on not just physical fitness but also mental and emotional wellness. Viva differentiates itself from other gym networks through its use of data and technology, including artificial intelligence (AI). This technology allows Viva to analyse data such as the male-to-female membership ratio to adjust the fitness equipment ratio provided at each site. It can also analyse the usage patterns of equipment and identify reasons why members stop coming on certain days. Viva's clever use of technology has enabled the company to increase its portfolio utilisation to 70%, with plans to increase it to over 75%. This has been achieved despite the opening of 41 clubs on average over the last three years, which would naturally decrease utilisation rates. In addition to opening new clubs, Viva Leisure is also building greenfield sites, which allows the company to build gyms to its specifications, sometimes even placing two complimentary clubs (for example a Club Lime and HIIT Republic) next to each other. This approach has contributed to the company's success in building a loyal customer base. Importantly, this is not F45It's understandable to be cautious about investing in a company when it doesn't fall within your circle of competence. One fitness company that has drawn a lot of negative attention recently is F45 (NASDAQ: FXLV). The Company's growth story has hit a wall, and its share price has dropped a whopping 93.64% since IPO in July 2021. Much unlike Viva Leisure, F45 has a very low customer retention rate, slowing like-for-like sales across locations, the founders have exited, the Company recently lost its CEO and had to lay off 110 employees, thereby reducing its selling, general, and administrative expenses by between 40% to 50% from early 2022. On the other hand, Viva Leisure displays the characteristics we look for in a defensive and growth opportunity. Beyond the recent positive financial and operational results (see below), the founder is still leading the business and has skin in the game (CEO Harry Konstantinou significantly owns 26% of shares outstanding), the business has been able to pass on inflation to its customers whilst adding to its customer base and has a stable balance sheet to see it through any macro economic challenges in the near future. What’s happened recently?Not many industries were as adversely impacted as much during COVID as the fitness industry. At the height of the pandemic, all gyms in Australia were ordered to shut down. Around half of the industry's workers also quit their jobs, exacerbating the pressure on gym operators. Despite this, Viva Leisure was able to withstand the bumpy road and return to full operations during 2022. Viva has already had a record start to FY23. The Company's Annualised Revenue Run Rate (ARRR) was $130.2 million, up 41.9% since the beginning of the year. It also achieved a record average monthly revenue run rate of $11.1 million, up 42% this calendar year. Since December, Viva has also increased the total members across all its brands to ~325,000, up by 28,000. In the last half results, Viva almost doubled its revenue from $34 million in half-year FY22 to $67.4 million. Its bottom line profit (NPAT) also increased to $4.2 million. What’s next?The current low valuation of Viva’s shares is likely driven by the stock being in 'small-cap purgatory’ due to liquidity issues, but this is no restriction for the retail investor, and we believe the company's track record of execution makes it a compelling investment opportunity. Viva is on track to settle another three acquisitions in Western Australia before opening a dozen more sites in Queensland and Victoria during FY23. Viva can also capitalise on its self-funded organic rollout by undertaking more acquisitions. The Company will be able to take advantage of the brand recognition of Club Lime as locations increase above 100 centres. The Company's innovative use of data and technology, combined with its expansion plans and history of execution, makes it an attractive proposition. Additionally, the increasing importance of personal wellness to consumers provides a tailwind for Viva’s growth. Disclaimer: Viva Leisure (ASX: VVA) is currently held in the TAMIM Portfolios
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