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This IPO has soared 250% since listing. Should you invest?

A new IPO going gangbusters? Is it a buy-now, pay-later? A tech start up in the cloud, internet of things or artificial intelligence space? Or is it a junior miner that has struck gold?

No. Believe it or not, it’s fitness.

Viva Leisure Ltd (ASX: VVA) operates health clubs (gymnasiums) within the health and leisure industry. It offers customers several different membership options and a range of facilities. The IPO had an offer price of $1.00 and a market capitalisation at the offer price of $52.6 million.

The Viva share price has now soared more than 250% since hitting the ASX back in June.

What makes Viva so special?

Health and fitness is a popular theme in today’s day and age. A lot of people have some form of fitness-related membership (or pay for one to never use it). Viva’s business model centres around revenue generated from personal training licence/service fees, merchandise sales and casual entry fees.

The company aims to grow its business by expanding its geographic reach in a controlled approach through establishing greenfield locations and acquiring established businesses. Furthermore, it wants to harness the power of technology to drive efficiencies to minimise administrate costs, overheads and enable Viva to collect, analyse and monitor data relating to its membership and health clubs.

In FY19, Viva delivered strong growth figures across the board with revenue increasing 37.1%, net profit after tax increasing 8.2% and its membership base increasing 51% to 54,039 members.

Viva has completed 2 acquisitions since its IPO. It first acquired 3 Fitness 24/7 businesses in Albury, NSW and Wodonga, Victoria. These 3 clubs extended the company’s geographic reach into regional Australia, and established its first location in Victoria. The clubs are expected to contribute $3.0 million in revenues and $1.4 million in earnings before interest, tax, depreciation and amortisation (EBITDA) in FY20.

On 16 October, Viva announced the acquisition of e8 HealthWorks Fitness Centres in Queensland. This will add more than 10,000 new members to Viva’s growing portfolio, which represents a 26% increase in overall membership, year to date.

It expects net member growth (excluding acquisitions) to run at approximately 1,110 members per month. The pipeline of new sites continues to be strong, with a further 8 greenfield locations currently under negotiation.

Foolish takeaway

I believe Viva is strongly positioned to capitalise on the fitness trend and continue to aggressively expand its business, both organically and via acquisition. It trades at a premium price-to-earnings ratio of 50, but with $14.4 million cash in the bank and a strong pipeline it has the ability to continue to deliver meaningful shareholder value in the short–medium term.

What I am worried about is the crowded nature of the gym/fitness industry. It almost seems like there is a 24/7 gym around every corner. But in response to this crowded market, Viva is expanding into significantly under-serviced regional markets with limited competition and attractive margins. While the share price does appear to be quite extended, in my opinion Viva is still a strong medium-term investment.

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Motley Fool contributor Lina Lim has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Viva Leisure Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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