Barclays upgrades The Gym Group on attractive growth prospects

Shares in The Gym Group gained on Thursday as analysts at Barclays upgraded the “fastest growing stock” in its coverage.

The Gym Group was upgraded to ‘overweight’ from ‘equal weight’, although its price target was lowered to 230p from 243p reflecting a peer group de-rating, as Barclays believes that the company’s fundamentals are on track and its growth is attractive.

The company offers the highest growth rate within Barclays' coverage universe, with an earnings before interest, tax, depreciation and amortisation (EBITDA) and earnings per share compound annual growth rate of 20% over the 2016 and 2019 financial years.

Barclays' positive stance is based on its proprietary pricing analysis which indicated that monthly membership costs are gradually rising, suggesting few signs of oversupply.

EBITDA per mature gym increased in 2016, which allayed concerns that incremental sites were generating poor return on capital employed (ROCE), and the company’s estate was seeing falling ROCE as new industry supply enters.

Barclays is most concerned about over supply so it has considered potential profit and loss dynamics if the company stopped expanding at the end of the 2016 financial year. The bank estimated that the 34 ‘new’ sites that have been open for less than two years could generate £16m of EBITDA at maturity compared to the current EBITDA of £5.9m.

The bank said that The Gym Group’s share price has fallen substantially in the past year - down about 34% from its April 2016 peak compared to the FTSE All Share which was up 14% - but there has been no obvious change in its fundamentals.

Barclays believes the fundamentals have improved and, although consensus forecasts have fallen since the initial public offering in November 2015, its forecasts are largely unchanged, apart from the increase in share-based payment guidance.

Even though the bank cut its price target, it sees around 26% upside potential to the price target.

Shares in The Gym Group were up 1.79% to 185p at 0813 BST.