Oxy Capital's Pedro Sousa thesis on high quality, low cost gym facilities in the UK $GYM.L

Episode Summary

Executive Summary: The episode focuses on UK low-cost gym operator Gym Group, with Pedro Ahsosa arguing the stock is mispriced versus peers like Basic-Fit due to post-COVID margin pressure, energy costs, and investor skepticism. He believes mature-club margins can recover, new openings can still earn ~30% ROIC, and the business offers a margin of safety at a low EV/EBITDA multiple.

Main Topics: Why Gym Group is attractive versus Basic-Fit (Priority: 5/5): Pedro argues Gym Group offers a cheaper entry point than Basic-Fit, with more room for earnings recovery and less demanding expectations baked into the valuation. Post-COVID operating recovery and margin normalization (Priority: 5/5): The discussion centers on why margins did not rebound as quickly as expected after COVID, including higher energy, wage inflation, and slower gym ramp-up periods. Pricing power and membership tiering (Priority: 4/5): The speakers discuss the industry’s ability to raise prices, Gym Group’s no-contract model, and the rollout of multi-tier pricing to improve yields and manage peak demand. Replacement cost and embedded asset value (Priority: 4/5): Pedro highlights that the current enterprise value appears below or near replacement cost for the gym estate, implying the subscription base and operating optionality come for free. New CEO and strategic reset (Priority: 4/5): The new CEO, with subscription-business experience, is expected to improve pricing, churn management, and investor communication through a more ambitious capital markets day. Long-term white space in UK low-cost fitness (Priority: 3/5): The thesis depends on continued growth in gym penetration and low-cost share, supported by comparisons with the US, Netherlands, and Nordic markets.

Key Arguments: Gym Group trades at a lower multiple than Basic-Fit, offering a larger margin of safety despite similar long-term growth potential. Public investors underappreciate how slowly new gyms mature; it can take 2-3 years to reach normalized EBITDA per gym. Energy costs and wage inflation materially depressed 2023 margins, masking underlying operating leverage. The mature gym base still appears capable of recovering toward pre-COVID profitability through pricing rather than just volume. The company’s no-contract model delayed post-COVID membership recovery versus Basic-Fit, but does not negate long-term economics. Gym Group’s clubs appear operationally comparable to PureGym based on reviews, employee checks, and location mapping. A three-tier pricing strategy should help monetize willingness to pay and reduce congestion at peak hours. Even if white-space growth slows, the current valuation already embeds a depressed earnings base, limiting downside. Low-cost gym models have historically shown resilience in recessions compared with premium fitness concepts. The company’s new openings are still expected to earn roughly 30% ROIC, making expansion attractive if execution holds.

Data Points: Gym count: ~230 gyms - Current Gym Group estate discussed by Pedro Enterprise value: ~£260 million - Gym Group valuation cited during the discussion Valuation multiple: ~6x EBITDA - Trading multiple for Gym Group versus ~7x for Basic-Fit Basic-Fit valuation multiple: ~7x EBITDA - Used as peer comparison Mature gym EBITDA gap: ~30% below pre-COVID EBITDA - Pedro’s view of under-recovered mature gyms Energy cost impact in 2023: ~£10 million - Estimated drag on Gym Group’s 2023 earnings H1 2023 revenue: £204 million - Andrew referenced reported interim numbers H1 2023 adjusted EBITDA less normalized rent: £17 million - Andrew referenced interim numbers 2023 EBITDA: ~£37 million - Pedro’s estimate, in line with consensus 2023 EBITDA margin: ~18% pre-IFRS 16 / after rent - Pedro’s estimate for full-year 2023 2022 EBITDA margin: ~22% - Benchmark used to show 2023 margin compression 2024 EBITDA estimate: ~£45 million - Pedro’s projection for next year HQ costs today: ~£20 million - Used in Pedro’s bridge from club EBITDA to group EBITDA HQ costs in five years: ~£25 million - Pedro’s assumption in long-range model New gym build cost: ~£1.4 million per gym - Used to estimate replacement cost of the estate Potential replacement cost of estate: ~£320 million - 230 gyms x £1.4 million each, rough replacement-cost framing Members per gym: ~3,750 - Andrew’s estimate used to bridge to club revenue ARPU: ~£19 per month - Andrew used this to approximate gym-level revenue Premium tier penetration: ~30% - Share of members using premium access today Basic-Fit premium tier target: 50% in 2024 - Peer benchmark for tiering adoption UK gym penetration: 16% - Share of population going to the gym, cited as white space US gym penetration: 20% - Used as a higher-penetration comparison Low-cost share in UK gyms: ~50% - Pedro’s estimate of low-cost share in the UK Low-cost share in the Netherlands: ~70% - Higher mature-market benchmark Potential opening cadence: 20 gyms/year for several years - Pedro’s modeled growth pace after normalization Long-term gym base scenario: ~330 gyms - Illustrative five-year growth case from 230 gyms Illustrative group EBITDA in five years: ~£100 million to £135 million - Pedro’s range depending on pricing recovery and opening cadence Current leverage: below 2x EBITDA - Used to argue limited blow-up risk Replacement cost versus EV: EV below or near replacement cost - Core asset-backing argument

Pivotal Quotes: "The company trades at six times the bid in 2024. It's a 260 million enterprise value." — Pedro Ahsosa: Establishing the starting valuation and why the stock looks cheap "We think the market is not pressing that in either." — Pedro Ahsosa: Referring to the market underestimating 30% ROIC on new openings and the upside from pricing recovery "It's very cheap, right? If you normalize the current store-based earnings, this is fairly valued to cheap, but they've got this huge white space to invest in at really attractive returns that we've proven out across multiple markets." — Andrew Walker: Andrew summarizing the bull case and the appeal of the valuation plus growth runway

Implications: If Pedro is right, Gym Group offers a rare combo of depressed current earnings, optionality from pricing and ramp-up, and long-duration growth at a low entry price. For the sector, it suggests low-cost gyms may still have structural pricing power and white space in Europe.