BSFFF - Greystone Capital - Basic-Fit: Trading At Cheap Absolute And Relative Valuations

2023-07-31 13:15:00 ET

Summary

• Basic-Fit is the largest fitness operator in Europe with strong unit economics and low-cost leadership.
• Analysts' perceptions of BSFFF have caused share price fluctuations, but the stock is up 30% YTD.
• Basic-Fit's growth strategy remains intact, with memberships growing, new clubs being built, and competitors struggling.

The following segment was excerpted from this fund letter.

Basic-Fit ( OTCPK:BSFFF )

Basic-Fit is our gym business and the largest fitness operator in Europe, that, similar to RICK, sports outstanding unit economics on its mature club base, along with very strong barriers to scale and elements of low-cost leadership that have positioned them well moving forward. One frustrating part of this investment has been wading through the perception surrounding the business including how the company is covered by various analysts (typically causing the share price to react strongly to new neutral, hold, or sell recommendations based on non-essential information). For example, the draconian scenarios the market braced for during 2022 regarding European energy costs and the need for increased liquidity for the business have abated, the company has demonstrated their ability to raise prices (and laid out the pricing math), and they’ve surpassed most expectations regarding membership growth in difficult to penetrate geographies, yet many analysts refuse to update their cash flow models or upgrade their price targets. There are also analysts covering the business who have not previously analyzed the equity side of a company, leading to uninformed opinions based on an inapplicable skill set.

But woe is not us. BFIT stock is up around 30% YTD, and this is what makes a market. Typically, our estimates and projections will differ widely from what’s priced into the long-term business valuation. Management is also non-promotional, and giving quarterly updates for this business is not always conducive to strong stock performance. The company is attempting to grow significantly faster than both the industry and competitors, for which there will certainly be bumps in the road. We have seen plenty during our ownership period alone. With that said, Basic-Fit’s growth strategy remains largely intact, and I’ve been very pleased with management’s treatment of shareholder capital.

There are concerns about short-term results, as analysts fight over the exact NTM EBITDA figure to use, the exact NTM club openings number, and the exact membership yield number, down to the tenth of a cent. We are looking further down the road. I’ve written about Basic-Fit’s cost structure being the wildcard moving forward. There is now clarity there. I’ve written about a worst-case scenario in energy costs. Those have abated. Memberships are growing, new clubs are being built, competitors are struggling, and BFIT is raising prices. All in all, there is execution risk...for competitors!

I’ve laid out my math for Basic Fit in past communications, but put simply, investors can purchase shares in this business for a single digit multiple of EBITDA on the mature club base alone . From a growth perspective, BFIT is opening 200 clubs per year with likely better unit economics. BFIT trades at cheap absolute and relative valuations, is growing significantly faster than both the industry and competitors and shows no signs of slowing down its expansion plans. As the membership base grows, premium pricing uptake increases, and new clubs are built, the strength of the business will shine through and the market should value it more appropriately on an absolute basis. Last quarter I outlined the reasons behind adding to our position in Q1. Those comments stand, and I continue to look forward to what the remainder of this year as well as 2024 will bring.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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