Friday, August 17, 2018

Basic Fit intrinsic value ? Update 2018

July 11th 2016 I wrote: "Basic Fit is a recent IPO, they are opening gyms hand over fist. The stock price has gone from 17,50 down to 12,60 and back up to 16,45." It seemed expensive to me. See below.

Today August 17th 2018, the company is making money and the share price is EUR 31. I screwed up.

SECTOR: [PASS]  Basic-Fit is neither a technology nor financial Company, and therefore this methodology is applicable. 

SALES: [PASS] The investor must s0elect companies of "adequate size". This includes companies with annual sales greater than €260 million. Basic-Fit's estimated 2018 sales of EUR 400 million, passes this test.

CURRENT RATIO: [FAIL] The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. Basic-Fit's current ratio €29m/€97m of 0.3 fails this test.

LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [FAIL] For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that do not meet this criterion lack the financial stability that this methodology likes to see. The long-term debt for Basic-Fit is €345 million, while the net current assets are minus €68 million. Basic-Fit fails this test.

LONG-TERM EPS GROWTH:  [FAIL] Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. Companies with this type of growth tend to be financially secure and have proven themselves over time. Basic-Fit was losing money until 2017 (due to growth) and fails this test.

Earnings Yield: [FAIL] The Earnings/Price (inverse P/E) %, based on the lesser of the current Earnings Yield or the Yield using average earnings over the last 3 fiscal years, must be "acceptable", which this methodology states is greater than 6,5%. Stocks with higher earnings yields are more defensive by nature. Basic-Fit's E/P of 1% (using this 0,40 Earnings per share) fails this test.

Graham Number value: [FAIL] The Price/Book ratio must also be reasonable. That is the Graham number value must be greater than the market price. Basic-Fit has a Graham number of (15 x €0,4 EPS x 1,5 x €5,7 Book Value) = €5 

Dividend: No dividend

Basic-Fit is expanding rapidly in France, where there might be less competition than in Holland (I don't know). It can be argued that the company is making a lot of money and investing to earn more. 

Cash flow math from 1st Half Year Report 2018
"The cash flow pre-expansion capex, defined as adjusted EBITDA minus maintenance capex, was €46.3 million, an increase of 41% compared to €32.9 million in H1 2017. Maintenance capex in H1 2018 was €10.4 million compared to €12.6 million in H1 2017. This translates into an average of €19 thousand maintenance costs per club (H1 2017: €28 thousand). The decline year on year is related to the planning to do most of the maintenance in the second half of the year. We continue to expect maintenance capex of around €55 thousand per club for the full year. " 
If we say the existing business is generating €75 million a year and divide that by how much you would be paying for the whole company. (Market cap = €31 x 55 million shares = €1 705 million) then you get a sort of Earnings Yield of 4%.

Conclusion today August 2018: If the stock price fell back down to € 15 it might be a buy.

What I wrote July 2016: It's adjusted EPS (which seem to be EBITDA per share?) = 0,11 per share in first half of 2016. Say full year adjusted earnings are 0,25 per share, then Basic Fit is trading today for a Earnings Yield (inverse PE) of 0,25 Earnings divided by 16,45 share price = 1,5%

Say "profit" doubles and you are willing to pay 15x profit then you get 0,25 x 2 = 0,50 x 15 = 7,50 Euros. Anything more than this seems (to me) ridiculously expensive.

Will be interesting to follow during the coming years, but not an investment for the Defensive Investor today at a Market Cap of 900m Euros and Enterprise Value of more than a billion and annual sales of less than 300m Euros...

Beware of EBITDA, as Charlie Munger says, when you see "EBITDA" think "BullSh*t".

I’ll leave it to Warren Buffett to explain:
“People who use EBITDA are either trying to con you or they’re conning themselves. Telecoms, for example, spend every dime that’s coming in. Interest and taxes are real costs.”

As far as Discounted Cash Flow is concerned, if there is no CF there is no DCF.

Conclusion: Growing revenue quickly, but stock seems expensive. Not a stock for the Defensive Investor.

See for quality profitable companies.

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