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Viva Leisure Limited (ASX:VVA): get healthy

Viva Leisure Limited (ASX:VVA) operates in the health and leisure industry in Australia, with its primary business being a health club operator (gym). VVA has built its brands on passion and the belief that first-time gym users and casual fitness members can achieve their personal fitness goals in a supportive and non-intimidating environment. Through the company’s Club Lime brand, VVA has become recognised in its market as a brand that stands for value, quality and a club or community atmosphere. Here is the list of VVA’s brand.

VVA was founded in Canberra in 2004. Over the last 15 years, VVA acquired 11 clubs and opened 21 clubs. It also expanded to regional NSW, regional VIC and QLD. In June 2019, the company took a further step to expand and list on the ASX through raising capital. The money was spent on acquisition and expanding the established business. We believe this company has a great growth potential with an attractive price.

Business Model and Strategy

VVA operates on what it calls a ‘hub and spoke’ model with larger (big box) health clubs being supported by smaller (standard, express and boutique) health clubs. VVA utilises its technology to develop competitive advantage. The company is able to identify the preferred size and type of health club and facilities required to service a particular geographic area though data analysis. Then VVA optimises the member experience while maintaining approximately two members per square metres. This approach allows VVA to reach cash flow break-even quickly and manage the capital more efficiently.

Besides the business expansion, customer experience is also enhanced through technology. For example, VVA operates fully automated 24-hour facilities. They are not just normal 24-hour facilities. VVA has staff monitoring locations and systems 24/7. This allows VVA to remotely service members who, for example, are unable to gain entry no matter what time of the day. This customer experience is also a reason why the company can grow its number of members at a fast pace.

Apart from opening new clubs, VVA also acquires health clubs at attractive price and creates synergies from cost saving and revenue growth. The recent acquisition of FitnFast (FnF) clubs is a good example. VVA announced this acquisition on 2 December 2019. VVA used $13.5 million to purchase 13 health clubs located in the ACT, NSW and VIC. FY19 revenue of FnF is $17.9 million and EBITDA is $3.6 million. In other words, the acquisition is priced at 3.79x EBITDA. VVA expects to achieve $1.2 million per annum synergies, representing 2.8x post-synergies EBITDA. The most obvious synergy is from revenue growth. FnF is now operating at 1.37 members per square metre while VVA is at 2.0 members per square metre. This represents a large upside in revenue growth for FnF. Cost synergy mainly comes from back-office utilisation, implementation of VVA hub-spoke model and IT systems to increase the performance of the business. This example shows that VVA is able to expand in different states and increase the number of members through acquisition.

Financial and Valuation

VVA has a strong competitive advantage over other competitors (proven by the number of members per square metres). VVA’s approach is to expand aggressively through acquisition, then implement its technology into the new clubs to create synergies. The company continues to diversify and reduce reliance on the ACT membership. We believe that the company is executing a good strategy to utilise its technology and grow the business. As a result, the company is trading an attractive forward (FY21) PE of 14x.

Any information has been prepared for the purpose of providing general information only, without taking account of any particular investor's objectives., financial situation or needs, It is not an offer or invitation for subscription or purchase, or a recommendation of any financial product and it is not to be relied on by investors in making an investment decision. Past performance is not a reliable indicator of future performance. To the extent any general financial product advice is provided in this document, it is provided by Glennon Capital Pty Ltd ACN 137 219 866, AFSL No. 338 567. An investor, before acting on anything construed as advice, should consider the appropriateness of such construction and advice having regard to their objectives, financial situation or needs.

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