I've been following for a while and share frustrations around EBITDA. It's close to useless for a business like this. It's pretty hard to grasp what actual FCF i due to constant rollouts and acquisitions.

There's also been some questionable capital management decisions being made, I think they're going too hard on acquisitions.

@UlladullaDave the $20.1 in the expenses line would factor in both property and equipment rental payments, they then only add back the deprecation on the property leases to the EBIT line? To me it seems like they're still depreciating the leased equipment on the EBIT line?

Hi @PeregrineCapital

No, I think that $20.1m adjustment is the depreciation on the leased property + the interest element ($2.8m) of those lease payments. The leases on the equipment is totally excluded and carried below the EBITDA line post their AASB 16 adjustment.

You can see here the total interest expense on property + equipment is $7.9m. The actual cash lease expense for the property + equipment (principal + interest) was $24.5m

You get the feeling buying a collection of gyms in Western Australia is because they are struggling to find anything on the east coast. They have drifted so far from their stated strategy in their prospectus of buying regional gyms in NSW and Victoria.

Strip all the adjustments out and this is a business that does something as unsexy as running gyms and for their trouble they earnt $1.5m on $80m in revenue for the half. There's not much wriggle room from a utilisation/pricing perspective when you have ~$25m in fixed costs on $80m in revenue and < 2>

Agree completely @JPPicard, I'm not as steadfast as some against the use of EBITDA as a preferred reporting metric. For me it depends on the business and what is included in those cost lines in the P&L vs what cash expenses are going out through the CF statement. Given cashflow can be lumpy, I am fine with management finding the best reporting metric to smooth out free cashflow generation to give a better representation over a period. For capital light businesses with historical amortisation of intangibles not being reinvested, EBITDA can be a perfectly fine metric to use as a proxy for free cashflow.

However that is not VVA. I tweeted once about their use of EBITDA and how I thought using pre-AASB16 was a bit of a furphy to try and produce an air of "conservatism" in their reporting despite the fact traditional D&A is a very real cost for them and if you go back through reports NPAT is a pretty close proxy for free cashflow if you adjust for acquisitions. After the CEO responded to that tweet I thought it was best not to comment on them publicly anymore but my thoughts haven't changed much privately.

Gyms are notoriously tough businesses no matter where you look around the world. They are capital intensive, not just up front to fit out but the ongoing reinvestment in new machines and refurbs every few years. I can't comment specifically on what other fundies may see in VVA, but it wouldn't be the first roll-up to receive the same attention. That said, they acquired some WA gyms recently on the same 4x EBITDA multiple they trade on and funded it all with an equity raise? I get the logic of roll-ups, but that one didn't make sense to me!

@UlladullaDave Thanks for that, I understand now!

@Wini I agree with your sentiments RE gyms as a business, however I think VVA has a decent competitive advantage over its franchise competitors in terms of network effect and cost of capital. I also think that the low margins are a sort of moat in themselves. Why would you start up an independent competitor gym from a sub 5% profit margin? VVA is dominant in the ACT market, and with such a transient population in Canberra, I can understand the logic in expanding nationally and "exporting" its members when they move elsewhere in Australia.

I thought VVA was done with capital raisings, the WA announcement really pissed me off. Wini puts it perfectly in his last sentence "That said, they acquired some WA gyms recently on the same 4x EBITDA multiple they trade on and funded it all with an equity raise? I get the logic of roll-ups, but that one didn't make sense to me!"

I still think there's something here at the right price, it would make it easier if management were consistent and more boring.