VVA: Fitness Operator - The Accounting Confusion Discount
VVA: Fitness Operator - The Accounting Confusion Discount
In a Nutshell
Executive Summary
In a Nutshell
Viva Leisure operates 518 gym locations across Australia under multiple brands and runs a payments-technology platform called TPLR. At A$1.70 vs fair value A$3.38, the stock is 99% undervalued. The key driver is market confusion over accounting treatment—VVA trades at 4.5x EV/EBITDA versus 10x for global peers despite comparable margins and superior growth, suggesting the discount reflects AASB16 complexity and micro-cap illiquidity rather than fundamental quality.
Investor Profiles
| Profile | Rating | Rationale |
|---|---|---|
| Income | ★☆☆☆☆ | Not suitable for income investors. The company pays no dividend and has zero payout policy. All cash flow is directed toward debt reduction (currently 1.5x net leverage) and organic expansion. No dividend initiation expected until net debt falls below 1.0x, likely late FY28. |
| Value | ★★★★★ | Exceptional opportunity for value investors. VVA trades at 4.5x EV/EBITDA—a 55% discount to the 10x peer median—despite delivering 22% margins and 17% organic growth. The 25% free cash flow yield exceeds the peer average by 5x. Even quality-adjusted (0.85x peers), implied fair value is A$3.62, suggesting 113% upside. The catalyst is resolution of AASB16 accounting confusion and micro-cap illiquidity as analyst coverage initiates. |
| Growth | ★★☆☆☆ | Not ideal for pure growth investors. Revenue growth is decelerating from 30% to a guided 12% as acquisition-led expansion pivots to organic. The 5-year forecasted CAGR is 8.5%—respectable but unremarkable. Member additions remain strong (+7,000 since December), but pricing power is limited (ARPM flat at $32/month). The TPLR segment (payments/vending) is growing 45%, but from a small base of 8% of revenue. |
| Quality | ★★★☆☆ | Mixed for quality investors. The business scores 5.9/10 on comprehensive quality assessment versus 6.7/10 peer average. ROIC of 11% exceeds WACC by only 2%—thin for a compounder. The moat is narrow (4/10) with 4–5 year durability, dependent on TPLR platform differentiation. Management credibility is strong (8.6/10) with 101% guidance achievement and 19% founder ownership, but no succession plan creates key-person risk. |
| Thematic | ★★☆☆☆ | Limited thematic appeal. The fitness industry is growing modestly (4–5% in Australia), but VVA is geographically concentrated in a single market—no international diversification. The platform thesis (TPLR) offers some technology/fintech exposure, but execution is unproven (zero third-party licensing contracts). Structural consolidation of fragmented independents is a tailwind, but not transformational. Macro headwinds (RBA hiking, wage inflation) offset secular fitness trends. |
Best Fit: Value Investors. VVA offers classic deep-value characteristics—a 99% discount to fair value driven by market mispricing rather than operational deterioration. The 25% free cash flow yield and 4.7:1 upside-downside asymmetry provide substantial margin of safety. Catalysts are identifiable (August FY26 results, analyst coverage initiation, TPLR scaling proof) with a 2–3 year horizon suitable for patient value investors comfortable with micro-cap illiquidity.
Executive Summary
Viva Leisure is Australia's only listed fitness operator, running 518 gym locations under five brands (Club Lime, Plus Fitness, World Gym, Hiit Republic, and Fitness Today). The company generates 88% of revenue from membership fees across corporate-owned clubs serving 656,000 members. The remaining 12% comes from franchise royalties (4%) and TPLR—a proprietary platform for payments processing (Viva Pay), vending, and technology licensing (8%).
First-half FY26 results showed revenue up 18% to $116.5 million, with EBITDA rising 15% to $26.0 million. Organic member additions of 7,000 since December drove the health clubs segment, while TPLR revenue grew 45% to $9.3 million. Margins held at 22.4% despite wage inflation, supported by TPLR's higher-margin mix.
The investment case rests on valuation dislocation. VVA trades at 4.5x EV/EBITDA versus 10x for global peers (Planet Fitness, Basic-Fit, The Gym Group). The 55% discount appears driven by AASB16 accounting confusion (market may incorrectly deduct $271 million in lease liabilities from enterprise value), micro-cap illiquidity, and scepticism toward the TPLR platform thesis. Each percentage point that TPLR grows as a proportion of revenue adds 10–15 basis points to blended margins at minimal marginal cost.
At A$1.70 vs fair value A$3.38, the stock is 99% undervalued.
Results & Outlook
What happened?
First-half FY26 delivered revenue of $116.5 million (up 18%) and EBITDA of $26.0 million (up 15%). The health clubs segment added 7,000 members organically—the first period with zero acquisitions—validating the shift from M&A-led to density-driven growth. TPLR revenue jumped 45% to $9.3 million as Viva Pay adoption reached 50% of the network and vending rollout continued. Employee costs grew 22% versus 18% revenue growth, reflecting Fair Work wage awards of 5.75%, but TPLR's margin contribution offset this pressure to hold EBITDA margins at 22.4%.
Key Metrics
| Metric | FY24A | FY25A | FY26E | FY27E |
|---|---|---|---|---|
| Revenue ($m) | 163 | 211 | 237 | 261 |
| EBITDA ($m) | 35 | 46 | 53 | 58 |
| EBITDA Margin (%) | 21.5 | 21.8 | 22.4 | 22.1 |
| Corporate Members ('000) | 522 | 598 | 656 | 707 |
| TPLR % Revenue | 5.0 | 6.6 | 8.1 | 9.6 |
| Net Debt/EBITDA (x) | — | — | 1.5 | 1.3 |
What's next?
Full-year FY26 guidance points to $237 million revenue and $53 million EBITDA. Management targets 12% revenue growth and 22%+ margins, implying TPLR must reach 9–10% of the mix by year-end. The key catalyst is World Gym's Viva Pay migration (scheduled H2 FY27), which would add ~100 locations to the platform and validate third-party licensing potential.
Leverage continues declining via cash generation—$42 million operating cash flow in the first half supports net debt falling toward 1.0x by FY28. Capital allocation has matured: zero acquisitions in the half-year, with management resuming buybacks at current prices (signalling insider conviction). The board has approved call options on World Gym Australia and Body Fit Systems, offering optionality for further network expansion if returns justify.
The critical monitorable is TPLR revenue trajectory. If it stalls below 8% of total revenue for two consecutive half-years, the margin expansion thesis weakens materially.
Valuation & Risks
| Metric | Value |
|---|---|
| Fair Value | A$3.38 |
| Current Price | A$1.70 |
| Upside | +99% |
| 90% Confidence Interval | A$2.54 – A$4.23 |
What could go wrong?
The single biggest risk is structural wage inflation permanently compressing margins. Employee costs already represent 29% of revenue and are growing faster than revenue itself (22% versus 18% in the half). Fair Work Commission awards are rising 5.5–6% annually—a rate VVA cannot pass through to members given weak pricing power (average revenue per member is flat at $32 monthly). If wage growth remains above 6% for three years while TPLR fails to scale beyond 10% of revenue, EBITDA margins compress by 100–250 basis points toward 20%. This outcome carries 35% probability and would de-rate the multiple to approximately 6x, implying fair value of $2.30—still 35% above the current price, but validating market scepticism. The risk is macro in nature (labour markets and RBA policy) and largely unhedgeable, making it the thesis's Achilles heel.