Leejam Sports has continued to expand its fitness centers, in line with its long-term expansion strategy, which has aided its revenue growth (1H 2022: +25.4% YoY). Net income in 1H 2022 also jumped 86.8% YoY, mainly aided by 1Q 2022 performance when Leejam posted net profit vs. net loss during 1Q 2021 which was marred by COVID. However, 2Q 2022 earnings performance surprised us, as, despite the largely improved operating conditions, net profit declined YoY. Leejam is witnessing a change in customers’ spending behavior, which we attribute to the current uncertain macroeconomic environment. The rising inflation and interest rates are eroding consumers’ purchasing power and affordability of products and services, in our view. This is constraining the ramp-up of the company’s new fitness centers, thereby adding pressure on margins.
2Q 2022 earnings synopsis: Leejam Sports’ 2Q 2022 top-line grew 5% YoY, driven by an across the board increase in different segment’s revenue (subscriptions: +2.2%; personal training: +8.4%; rental income: +176.3%). However, total revenue fell ~9% short of our forecast of SAR 256.5mn, primarily attributable to an 11% miss in the subscriptions & membership income (85.3% of 2Q 2022 top line). Subscriptions revenue of female centers slid 9.8% YoY (our estimate: +30% YoY), which mainly weighed on the revenue growth of this segment, as the subscriptions & membership receipts of the male centers rose 6% YoY. Costs outpaced revenue growth with new centers continuing to be in the ramp-up phase and a decrease in rent concessions as the situation normalizes post-COVID. Consequently, operating, and net profit fell c. 22% and 29% YoY, missing our estimate by 35% and 43%, respectively.
Valuation and risks:
We continue to value Leejam based on blended valuation methodologies – (i) Discounted Cash Flow (DCF) and (ii) Relative Valuation (using P/E and EV/EBITDA multiples) with equal weights assigned to each of them. While the addition of new gyms has matched our expectations till now (151 by 1H 2022-end), we lower our forecasts for new gym additions during 2H 2022. We now expect total new gyms at the end of FY 2022 to be at the lower end of the company’s target of 157-164 (vs. 160 forecasted, previously), whereas the FY 2022 average per center revenue is estimated at ~SAR 6.4mn (~SAR 6.9mn, previously). We also expect the ramp-up of new centers to remain slow amid the persistent inflationary pressures, and hence reduce our FY 2022 EPS estimate by ~24% to SAR 4.14. Yet, with the company remaining committed to its expansion plan, a market leading position, and around 25% correction in the stock price since the release of the company’s 2Q results, we assign an Accumulate rating on it with a target price of SAR 89.00, implying c.11% upside. Currently, the stock trades at 19.3x P/E and 10.4x EV/EBITDA, based on our FY 2022 estimates. Downside risks to our valuation include less than expected addition of new centers, below-estimated average realization per center, and lower-than-estimated margins. Key upside risks to our valuation include more than expected addition of new centers, better than estimated average per center revenue, and higher than forecasted profitability.