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NB: this is a sample of my work, not investment advice. Do your own research before taking a position in any of the securities mentioned in the post below. The author may hold positions in any of the securities mentioned.

Below is the one-page write up on TGYM. It's a condensed version of a much longer research paper.

Technogym (TGYM) is a manufacturer of fitness equipment for gyms and hotels around the world. The stock is a sell as the current market price overestimates revenue growth over the forecast horizon and beyond. In order to justify its current share price of €8.7 / share, the company must grow revenues at a 16% CAGR over the 2 years to 2022, then grow at 5-7% in perpetuity beyond. These are demanding expectations to say the least particularly in the context of end customers (mostly gyms and hotels) who are likely to spend the next few years repairing their balance sheets and sweating existing assets. Taken together, these factors indicate a company that is likely to struggle to justify its current valuation.

In a short thesis, overvaluation is not enough. One must understand the bull argument and when that’s likely to unravel. The bull thesis is based on revenue growth from either “everything going back to normal by 2022” and/or TGYMs continued expansion into home fitness (B2C), which will compensate for losses in the B2B segment. I believe both these scenarios are unlikely for reasons outlined below. I believe the bull thesis will fall apart in the next 12-24 months as revenue growth fails to deliver on expectations, leaving a company worth something in the range of €4.7 – 6.5 / share, 28 to 47% below current prices.

There are three main revenue headwinds facing the company. Struggling customers, likely pressure on memberships, and difficulty compensating for B2B losses with B2C growth.

First, TGYMs customers (mostly gyms at 55%, hotels at 15% and corporates at 15%) have endured major challenges during 2020 and the path to recovery is by no means easy. For example, The Gym Group (GYM LN) has seen revenues halve, and looks set to post a substantial loss in 2020. It has survived via equity issuances and government loans. Basic Fit (BFIT NA) is in a similarly challenging situation. I believe expansion plans are likely to be slowed, and replacement cycles lengthened as these groups engage in balance sheet repair. Struggling gyms also mean closures and a robust second hand/refurbished market, which will further harm TGYM’s prospects.

Second, gym memberships are likely to cheapen over the next few years. Gym members have become accustomed to exercising at home, be that over video classes or at a home gym (e.g. Peleton). Gyms are not as attractive as they once were for equipment or classes. Furthermore, in a recession environment, gym members are likely to move to the cheaper end of the spectrum of gyms in an effort to save money, which is a particular problem for the premium focussed TGYM. This indicates a reduction in sales volume, or pricing may be on the horizon.

Finally, B2C sales are unlikely to compensate to B2B losses. B2C accounts for 28% of 9m 2020 sales, up from 13% of 9m 2019 sales. Even with this robust performance, revenues still fell 24% 9m on 9m. Furthermore, home fitness is a highly competitive market, so gaining share is likely to be a difficult, low profitability exercise (no pun intended).

Factors to monitor:

1) Revenue growth at upcoming quarterly results

2) Revenue trends at customers (gyms and hotels)

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