The Gym Group (LSE: GYM), which as the name suggests runs fitness centres, expectedly had a washout year in 2020. With gyms closed for much of the year and even now, revenues came crashing down and the company went into losses.
But I think that the worst may really be over for the long-struggling UK share. In fact, I have been quite bullish on it and in this article I reiterate my stance with the following arguments.
#1. Consider its past performance
The pandemic has taken its toll on the Gym Group. But the past year has been an outlier. I am more inclined to assess it based on its pre-Covid-19 performance.
And that was pretty decent. Its revenues were growing year after year. While it did not have the same luck with its profits’ growth, it was consistently profitable too. That gives me confidence in the company’s ability to successfully run the business.
#2. The future looks positive
I think there is a good chance that it will bounce back after gyms are allowed to open on 12 April, in the phased end to the lockdown. In its full-year 2020 results released earlier today, the company said that when gyms do open in April, it “will be close to cash flow break-even”. This is a positive, when it is already burning £5m every month.
The Gym Group hopes to grow further after re-opening.
#3. Cheap UK share
Going by the UK share’s price movement, I am not the only investor who sees value in the Gym Group. When I last wrote about it in December, its share price had already doubled since August. It has gained another 60% since.
Despite these huge gains, however, I think this UK share is poised to make further gains. Its share price is still lower than it was pre-pandemic, at a time when more than one share’s price has not just gone back up to those levels but surpassed them.
While its earnings ratio—my preferred comparator for stocks—does not apply when a company is loss-making, the alternative price-to-book ratio is also muted at 2.4 times. Compare this to other small cap shares like, say the video game developer Team17‘s 9.2 times.
Risks to the UK share
That said the UK share is not without its risks. While in its earnings release the Gym Group says that most of its members will come back into the gyms right after they reopen, I would watch this number. The pandemic is not yet over and people may still be cautious about going back to the gym.
Conclusion
Overall, there are more risks to investing than in usual times, because the pandemic can make a comeback and the delicate financial health of many companies looms large. But I think prospects for the Gym Group look more positive than not. If it has more than doubled its share price in less than a year in 2020, I am optimistic this UK share can do so again.
