Introduction

Basic-Fit (OTCPK:BSFFF) is Europe’s biggest fitness operator. It owns 784 clubs and has 2,221,000 paying members. In this article, I will discuss Basic-Fit’s strong business model, elaborate its strong cash position, and how it can continue to expand its concept across Europe to the benefit of shareholders.

(Source: Basic-Fit IR)

Basic-Fit’s strong business model

Basic-Fit operates low-cost fitness centres all around Europe. It’s planning to open 150 new fitness locations every single year. However, that was a plan before COVID-19. I will elaborate later that it seems likely Basic-Fit will continue its expansion plan.

Its business model is based on providing quality clubs at a low price. You can become a Basic-Fit member for as low as €19.99 or pay €29.99 and get additional benefits. Obviously, Basic-Fit needs a lot of members to become profitable. On average, a mature fitness centre has 3,300 members. Basic-Fit has a couple of trends supporting its success. According to the Washington Post, Basic-Fit and other European fitness clubs are able to get leases at relatively cheap prices since shopping areas are struggling to fill spaces, and these clubs actually add tons of footprint to struggling shopping areas. One additional scaling advantage of Basic-Fit’s business model is its high number of clubs. If someone is a Basic-Fit member, one can go to every single Basic-Fit club, from Spain till the Netherlands. Over time, this scaling effect will strengthen if Basic-Fit continues to expand. This effect should not be underestimated. For a lot of people on the move, it’s great to be able to go to a random Basic-Fit nearby. The beautiful thing about this scaling effect is that it costs Basic-Fit nothing, but it seriously adds value to its subscription.

Basic-Fit has been growing its revenues at a fast pace for years. Its revenue growth rate actually accelerated from 23.3% in 2018 to 28.8% in 2019. At the same time, it has grown its adjusted EBITDA at a very comparable rate of 25% in 2019. In my opinion, this alone shows how effective Basic-Fit’s management is.

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Basic-Fit’s mature clubs

Basic-Fit’s mature fitness centres are very profitable. Their adjusted EBITDA margin is 50.5%. Most of their mature fitness centres are located in the Benelux where it started its journey to become a European fitness powerhouse. When Basic-Fit opens a location, it requires on average 24 months before that club matures, generally, a mature club has on average 3,300 paying members. Over the next 24 months, Basic-Fit expects its maturing clubs to increase Basic-Fit’s overall EBITDA from €113 million to €335 million. According to Basic-Fit, 405 of its 784 clubs are mature, so 379 are non-mature. This means the adjusted EBITDA margin of the 379 non-mature clubs is 8.3%. 80% of its clubs in the Benelux are mature. However, only 25% of its clubs in France and Spain are mature. As a consequence, Basic-Fit does need to showcase it can turn the clubs in the southern countries into cash cows. Otherwise, its future looks grim. Obviously, the clubs in France and Spain are newer, and that is why they have a lower EBITDA margin. However, it might, so that Basic-Fit will struggle to grow its profitability in Spain and France to similar levels as seen in the Benelux. Only time will tell.

(Source: Basic-Fit IR)

Basic-Fit continues to expand

Before the COVID-19 crisis, Basic-Fit had an ambitious growth trajectory. It planned to open 150 clubs every year until 2022 and expected consistent revenue growth of more than 20% YoY every year.

(Source: Basic-Fit IR)

During the COVID-19 crisis, Basic-Fit’s future started looking grim. Investors were wondering whether Basic-Fit’s clubs would even open again in 2020. There were high uncertainties surrounding the business. However, over the last months, more and more governments have allowed sports centres to open again. Thanks to this, Basic-Fit was relatively minorly impacted by the COVID-19 crisis. Most of its fitness centres were only closed for 2 or 3 months. Most people still hold their subscription at Basic-Fit. However, it did lose a minority of its revenues during the COVID-19 crisis, since it allowed clients to be compensated for not being able to use Basic-Fit’s services. As a consequence, Basic-Fit’s cash position worsened. Basic-Fit wants to continue to conquer Europe, which is why it has raised €133.333 million on the public market. Additionally, it was able to attain a €150 million accordion facility with ABN AMRO and Rabobank. In Q12020, before the equity raise and extended credit faculty, Basic-Fit had a cash position of around €75 million. Clearly, Basic-Fit has a big war chest to fuel further growth. The COVID-19 crisis likely pushed some local fitness clubs towards financial instability, an opportunity for Basic-Fit to step in and take them over. This is adequate since buying existing clubs is less capital intensive, and these clubs mature at a much higher pace than an entirely new Basic-Fit club. This is because Basic-Fit is able to take over the clientele of the old club.

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Valuation

At first glance, Basic-Fit’s PE ratio of 113 looks very expensive. However, as elaborated earlier, Basic-Fit has tons of growth potential, both in growing its number of clubs and growing its revenues at existing clubs. Even without investing in any new club, Basic-Fit’s EBITDA will likely double, maybe even triple. As elaborated earlier, this is an effect of its newer clubs maturing. However, Basic-Fit continues its expansion plans, which can seriously increase profitability in the long run.

Nevertheless, I believe Basic-Fit should be valued according to its future cash flows, not earnings. A Basic-Fit club becomes cash flow positive on average between 1,600 and 1,700 members. That’s great since that means nearly all Basic-Fit clubs are contributing cash. That’s why its net cash flow in 2019 from operating activities was €150 million, which is really high. In the short term, Basic-Fit uses that money to build new clubs, but eventually, that will stop. Currently, investors are buying Basic-Fit at a price to net cash flow from operations of 9.42. However, in the future, with more clubs, Basic-Fit’s net cash flow will increase even more. That means you are buying a company that is able to generate consistent cash flows at an incredibly cheap price. Obviously, Basic-Fit has other expenditures like interest expenditures and capital expenditures. However, it showcases how much money Basic-Fit’s underlying mature business is generating.

Basic-Fit’s growth has mostly been fueled by debts. It is uncertain how much of their available credit faculty it actually used during 2020. Basic-Fit’s long-term debt to equity ratio is at least 169%; that was at the end of 2019. However, it likely is substantially higher. This showcases that Basic-Fit is heavily in debt, and that makes it a relatively risky stock to own.

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Risks

The biggest risk for Basic-Fit is that the COVID-19 epidemic in Europe going out of control again. Currently, governments have been able to stop the widespread of the virus. However, countries are now opening up. If COVID-19 goes out of control, Basic-Fit’s fitness centres will need to be closed again. Combining this with Basic-Fit’s high debt load makes the stock a relatively risky buy at current stock prices.

Takeaway

Basic-Fit’s mature fitness clubs are cash cows. Basic-Fit’s valuation is cheap based on a future cash flow basis. However, it remains uncertain whether Basic-Fit will be able to grow its French and Spanish clubs to the same profitability levels as seen in the Benelux. Adding to this, COVID-19 creates high uncertainties for Basic-Fit. A new infection peak could cause clubs to be closed again. I believe Basic-Fit is a wonderful company in the making, however, is a relatively high-risk investment.

Disclosure: I am/we are long BSFFF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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