Pinned valuation:
November 23:
Market update looked quite positive to me. Key points for me below.
It seems like the business is being pivoted back to its DNA, which is low cost, large format, corporate owned gyms. With the competitive advantage being scale and lower cost of capital than nearly all its direct competitors.
It's simple maths. Acquire on 3-3.5x EBITDA, which equates to somewhere between 5-8x FCF once you factor in maintenance capex. If your WACC is below this, you can exploit the arbitrage. If VVA are acquiring at 8x (a 12.5% FCF yield) and are borrowing at around 10% in a worst-case scenario, they should do well.
Probably trading at around 10x underlying FCF at the moment, Which is probably about right.
August 23:
Results were well received by the market. I think they were ok, but the boutique fitness offering are struggling and I think they need to get more disciplined.
There's a few figures figures which I found interesting from the results. First FCF:
Subtracting all lease repayments, PPE and intangibles expenditure from operating cashflow a (probably harsh because some of it is genuine greenfield capex) I get FCF being $3.7 mil at the absolute lowest.
Using the most dovish assumptions you could get as high as about $9 mil in FCF (subtracting the $3.2 mil in tech spend from FCF shown above.)
The other thing that's interesting is PBT on a pre vs post AASB basis.
My understanding (correct me if I'm wrong) is that AASB 16 means that the annual increases in rent under the leases VVA has signed are "Straight Lined" and then discounted at an incremental borrowing rate, so the future increases in rent are actually factored into todays NPAT figure.
Given the amount of Capex that VVA has undertaken, I'd expect FCF to exceed NPAT going forward.
Sticking with the same valuation for now.
UlladullaDave
If the leases are linked to the CPI then at inception the lease asset/liability does not take into account any rent increases. In subsequent periods when the rent rises become known (ie what was the CPI) the depreciation and amortisation schedule needs to be recalculated. If the rent increases are like x% per year that is set at inception then that is all captured in the asset/liability at inception.
UlladullaDave
It's possible they have a "3% or the CPI whichever is greater" type clause in the lease in which case they would recognise the 3% at inception as the minimum step up, but AFAIK, AASB does not allow you to make assumptions about what the indexation might look like. Probably with good reason.
Just checked an accounting text and it has this...
PeregrineCapital
Hi Dave,
https://www.bdo.com.au/en-au/content/accounting-news/accounting-news-august-2018/ifrs-16
In this example, depreciation + interest expense > annual amount payable ($135,000 once you factor in the incentive) at the beginning of the lease. Once you get out to years 4 and 5, the opposite is true.
In the above example, the rental is a flat amount each year. However VVA would typically have a fixed annual 4% escalator in the rent payable under a lease they sign. These increases mean the ROU and lease liability would be higher at the beginning of the lease, and more interest (and depreciation maybe?) would be booked at the start of the lease.
My belief is that VVA would, on average be in the earlier stage of their leases and that this annual escalator further exacerbates the difference in key PRE and POST AASB 16 metrics that VVA reports. Although I'd definitely take your point that the difference is pretty minor?
Am I making any sense? ????????????
PeregrineCapital
My interest in the difference wasn't so much for val purposes,more just to verify there's no funny business going on. Do you know of any other reasons why there could be such a sizeable a difference in figures?
The cash rent is approx. $37mil, very close to the variance in expenses outlined above. For val purposes I reconstruct the cashflow statement, not P+L.
