UK’s gyms bounce higher than pre-Covid era

Packing sweaty, heavy-breathing strangers into enclosed spaces may seem like a disastrous business model for the post-pandemic era. But you would not know it from the love investors are showing shares and bonds of gyms in the UK.

Gym Group’s stock has jumped about 28% this year, recouping almost all its losses from Covid-19 closures. In the bond market, investors have piled into high-yield debt offerings from the budget chain Pure Gym and the more upmarket David Lloyd. While the gains are in line with the broader market recovery, gym operators are outperforming companies well placed to ride any economic rebound from the reopening.

As lockdowns ease, people are flooding back to their health clubs, while the newly fitness-conscious are signing up in droves, according to preliminary numbers from the UK gym industry. Pure Gym’s group membership is almost back to pre-pandemic levels, with its paying member base recovering to 91% as of May 9. Health club operators in the UK, Europe’s most high-profile gym companies in terms of investor attention, have become strong reopening plays.

“We’re not just seeing people return to the gym, but we’re seeing new members,” said Harry Barnick, an analyst at Third Bridge, an independent research provider. “There’s the potential for gyms to actually do better than pre-Covid.”

While that may be the case, it is apparent that the pandemic has shaken up the landscape. City-centre chains that did well in the pre-pandemic era now face an uncertain future as many fearful commuters continue to work from home. Budget gyms with cheap, flexible membership and venues dotted across the suburbs, on the other hand, look set to prosper. The same holds for high-end health clubs offering pampering as well as perspiration.

No frills

Take UK budget chain Pure Gym, for instance. The no-frills operator — with no swimming pools, minimal staff, leases on everything from buildings to equipment and venues in the suburbs — has seen subscriber numbers soar. Just more than half of its new members had never signed up at a gym before, according to the company’s first-quarter investor presentation. Members are coming to the gym more than they were pre-pandemic, with visits per subscriber per month 10%-15% higher than two years ago.

“Pure Gym is tapping into a real sweet spot at the moment,” said Mark Benbow, a high-yield fund manager at Aegon Asset. “People’s interest is being healthy, and yet needing flexibility. Being tied into expensive contracts isn’t appealing to most right now due to the uncertainty of the last year.” Pure Gym is one of the largest positions in Aegon’s maturity high-yield funds.

Pure Gym raised €445m through a bond sale in 2020 to finance its European expansion, while its private-equity owners provided a £100m equity injection to bolster its balance sheet. Investors who bought the bonds in November at 95c on the euro are sitting pretty, thanks to the positive momentum around the UK’s reopening; the bonds are now bid at 102.8c.

Even before the pandemic struck value gyms offered investors an attractive growth story. The sector boomed in the wake of the financial crisis, growing 121% between 2008 and 2012, while the gym sector overall grew 2.1%, according to an OC&C consumer survey.

The pandemic has made gyms even more appealing, said Mark Watts, a high-yield credit analyst at Intesa Sanpaolo.

“With some of the leisure and entertainment options limited or still closed, the younger demographic are expected to spend more on fitness,” he said.

Building strength

David Lloyd has already capitalised on the built-up momentum of the UK reopening trade and raised about €1bn equivalent of debt in its first bond sale last month. Rating company Fitch assigned the new debt a B+ based on the recovery of memberships after sites reopened in the U.K, and increased attendance as clubs gradually reopen in Europe. The £645m tranche of the sale was bid at 99.9p on the pound on Thursday after pricing at par last month.

The fate of gym operators on the continent has been something of a mixed bag. While shares in Dutch chain Basic-Fit have rebounded sharply to surpass pre-pandemic levels, those of two Scandinavian companies — Actic Group in Sweden and Sats in Norway — have yet to fully bounce back.

Granted, even in the UK, the shine may wear off a bit as the July 19 lifting of restrictions makes more activities available to people. Still, for the foreseeable future, location, pricing and flexibility will remain key, analysts said.

The city-centre sites of Virgin Active, for example, have typically appealed to gym goers wanting to fit in a workout between leaving the office and going home. But the company suffered a hammer blow last year as the government’s work-from-home guidance turned city centres into ghost towns. Virgin Active buckled under the weight of heavy rents amid falling memberships and restructured in May.

“Many small-scale UK gyms are undergoing consolidation and rumours of a buyout swirl around London-centric gym Virgin Active,” said Third Bridge’s Barnick. “Investors are mulling which kinds of gyms are viable in the post-Covid world.”

Virgin Active did not respond to a message seeking comment.

Meanwhile, amid worries about exercising in enclosed areas and the rise of virtual workouts and home gym equipment such as Peleton, after 15 months of lockdown measures, the industry’s medium-term prospects are promising, wrote RBC analyst Christine Zhou in an equities note to clients last month.

“With the focus on mental and physical health at the forefront, alongside the potential fallout from less well-capitalised operators in the near to medium term, the growth opportunities for well-financed leading players have only broadened,” she said.

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