ACTIC GROUP(ATIC)

”Personal training-segment expected to drive growth and margin expansion”

ANALYSTS: MELKER MELIN & DAVID RASO 2018-11-11

EQUITY RESEARCH REPORT

RATING

2

TABLE OF CONTENTS

Case Summary 3

Investment Thesis 4

Valuation 5

Management 6

SWOT-Analysis 7

Appendix 8

Disclaimer 10

COMPANY DESCRIPTIONActic Group AB (”Actic”) is a leading fitnesscompany listed on Nasdaq Stockholm, smallcap. The company is mainly present in theScandinavian countries and Germany. Acticcurrently has 180 facilities with over 224 000members. Gym-memberships (82% ofrevenue) and personal training (12%) are themain sources of revenue. Actic is focused onthe mid-to-premium segment of customers.

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Actic has three main value drivers. A high growth intheir PT-segment, which has driven revenues and isexpected to continue doing so. Furthermore,improved margins is a value driver, which is a resultof the expanding high-margin PT-segment and,finally, the third value driver is the benefits generatedfrom economies of scale as they expand.

VALUE DRIVERS

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The company has demonstrated strong historicaloperational cash-flows, but poor EBIT-margins andoccasional losses on the bottom line. In 2017 theyhad an EBITA-margin of 3.6% and a net income of-5.4 MSEK. As a result, the current dividend maybe suspended in the future.

FINANCIAL HISTORY

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The management and board is characterized by ahigh degree of ownership in the company. Thelargest shareholders are Ushi Limited and AthanaseAB, which hold 16.25% and 15.66% of the sharesrespectively. Stefan Charette, representing Athanase,has experience as CEO of Creades and Öresund.

MANAGEMENT

Actic operates in a stable market with strong cashflows. However, a high net debt to EBITDA of2.92x combined with some historical losses on thebottom line poses some risks.

RISK PROFILE

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Continuous acquisitions are expected tocontinue, which enables further growth. Actichad a growth of 9.2% CAGR between 2015 and2017, of which 6.6 percentage points came fromacquisitions. Actic paid an average price of 3.18xEBITDA for their acquisitions between 2016 and2017. Further acquisitions are expected, which isenabled by strong cash flows.

Growth potential in the high-margin PT-segment. With a historical growth of 68% CAGRin the PT-segment between 2014 and 2017, Acticis expected to continue growing in the segmentwith a 18.9% CAGR between 2018E and 2022E,and an expansion from 12% of revenues to 19% ofrevenues in the same period. Growth in the PT-segment has boosted average revenue per member(ARPM) from 273 to 339 SEK between 2014 and2017. The gross- and EBITDA-margin of the PT-segment is estimated at 55% and 40% respectively,which is significantly higher than Actic’s currentexpected EBITDA-margin for 2018 of 15.8%. As aresult, the EBITDA-margin is expected to increaseto 20.8% in 2022E.

Recent transformation in ownership. Strongownership control is necessary in order to makeefficient acquisitions and maintain cost control.The new main owner and chairman of the board isGöran Carlsson, who has a long history of workingin the board of listed companies. The secondlargest owner, Athanase, increased their ownershipfrom 7.90% to 15.66% in November 2017.Athanase is represented in the board by StefanCharette, who has previously been the CEO of thelisted investment companies Creades and Öresund.

The DCF valuation indicates an upside of6.1% in a base case. A DCF valuation gives anenterprise value of 1 125 MSEK, which, adjustedfor Actic’s net debt of 425 MSEK, indicates atarget equity share price of 44.05 SEK.

ACTIC GROUP (ATIC)Actic operates in the fragmented fitness club segment,which has had a CAGR growth of 2.1% between 2006and 2015 in Sweden and Norway combined. However,by making continuous acquisitions and by growingorganically in their high-margin personal trainer (PT)-segment Actic’s revenue is expected to show a CAGR of6.5% between 2018E and 2022E and an EBITDA-margin expansion from 15.8% to 20.8% in the same timeperiod.

ACTIC GROUP (ATIC)

Current Price (SEK) 41.50

52w Low/High 34.2 / 45.2

Market Cap (MSEK) 637

Net Debt (MSEK) 440

Enterprise Value (MSEK) 1 077

Sector Health

Exchange Small Cap

Next Report 2018-11-14

1 Year Chart

MSEK 2018E 2019E 2020E

Sales 993 1 085 1 177

Growth (%) 9.1 9.4 9.0

EBITDA 155 193 226

EBITDA Marg (%) 15.7 17.8 19.2

Earnings 28 54 73

Earnings Marg (%) 2.8 5.0 6.2

EV/S 1.1x 1.0x 0.9x

EV/EBITDA 7.2x 5.8x 4.9x

P/E 23.6x 12.2x 9.0x

EV/EBIT 19.3x 12.0x 9.1x

EBIT Marg (%) 5.8 8.5 10.2

FCF 29 5 21

ND/EBITDA 2.8x 2.3x 2.0x

3

Ownership

Ushi Limited (Göran Carlson) 16.25 %

Athanase AB 15.66 %

AFA Försäkring 10.00 %

Fjärde AP-fonden 9.82 %

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INVESTMENT THESIS

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Actic have three main sources of income. Gym-membership which, as ofQ2 2018, stands for 82% of total revenues, personal training (PT) (12%) andothers (6%). The company is estimated to have a growth of 6.5% CAGRbetween 2018E-2022E, and assumed to increase EBITDA-margins from15.7% to 20.8% in the same period. The growth is a result of continuousacquisitions as Actic continues to consolidate the market, as well ascontinued organic growth from their fast growing PT-segment.Improvements in EBITDA-margins are mainly attributable to the fastgrowing high-margin PT-segment.

Further market consolidation enables economies of scale. Consolidation ofthe market has led to the five biggest gym companies in Sweden increasing theirmarket share from 20% to 34%, during 2006-2016. The consolidation is partiallydriven by the digitalization trend, which creates barriers of entry. Actic has madeinvestments in their website and training app, both of which allow the user tostore personal health & fitness data. The website logs user statistics and rewardsusers points based on how often they train, which allow users to unlock benefitsand offers. This helps Actic differentiate their product, as well as create barriers ofentry for smaller companies. Further, it allows Actic to acquire gym clubs andintegrate these into Actic’s digital infrastructure at low cost. The fitness clubmarket has historically grown in line with inflation, and showed a CAGR in localcurrency of 2.1% between 2006-2015 in Norway and Sweden combined.

Increasing revenues and expanding margins driven by the PT-segment.Actic’s revenue from the PT-segment has had a growth of 68% CAGR between2014 and 2017, which has led to a CAGR in average revenue per member(ARPM) of 7.5% in the same period. However, the fitness club segment ischaracterized by low barriers of entry and price pressure, which could lead todifficulties in increasing the ARPM further. Actic’s management estimates theircompetitor’s PT-segment equals 17-25% of their total revenues, indicating furthergrowth potential, since Actic currently has 12% of sales coming from their PT-segment. Moreover, as Actic operates gyms in the mid-to-premium segment, theyattract customers with a high purchasing power, whom can pay for PT-services.Furthermore, starting from January 1st 2018, wellness grants in Sweden covers PT-costs, which should boost the sales in the segment further. Increasing sales in thesegment has also been expressed as a focus area from the management. The PT-segment is therefore estimated to grow from 12% of revenue in 2018E to 19% oftotal revenues in 2022E. Based on Actic’s prices and the average salaries forpersonal trainers, the PT-segment is estimated to have a gross margin of 55% andan EBITDA-margin of 40%. This, in combination with acquisitions, is expected toincrease the EBITDA-margin from 15.7% in 2018E to 20.8% in 2022E.

Continuous acquisitions enable further growth. Actic had a total revenuegrowth of 9.2% CAGR between 2015 and 2017, of which 6.6 percentage pointscould be attributed to acquisitions. Actic’s strong cash flows enables them to makecontinuous acquisitions and consolidate the market further. In 2016 and 2017,Actic had an EBITDA cash conversion ratio of 75% and 87% respectively. Actichas a ND/EBITDA ratio of 2.83x for 2018E, which could affect acquisitionsnegatively, since their goal is to keep ND/EBITDA below 3.0x. However, Actic’sacquisitions has historically been made at an average multiple of 3.18x EBITDA.Thus, acquisitions do not increase the current ND/EBITDA ratio by much.However, in 2016 Actic paid 2.7x EBITDA on average for their acquisitions, andan average price of 3.65x EBITDA in 2017. Thus, a continued consolidation ofthe market could lead to further increases in the price paid for acquisitions.

New strong owners improves governance. Actic's management has beencharacterized by lack of governance and loose ownership. In September, GöranCarlson (through Ushi Limited) showed up as the new largest owner with 16.25%of the shares. Athanase (represented by Stefan Charette) increased their ownershipfrom 7.90% of the shares to 15.66% in November 2017, which gives Actic twostrong owners. Charette has a long history of managing listed companies, and hasbeen the CEO of the listed investment companies Creades and Öresund.

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20%

34%

2006 2016

The five biggest players share of the market in Sweden

2.73x

3.65x

2016 2017

Average P/EBITDA multiple paid for acquisitions

Total revenue (MSEK) and PT-share of revenue

PT-share of total revenue

VALUATION

2022E Bull Base Bear

Revenue 1 304 1 279 1 234

EBITDA 280 266 242

EBITDA Marg (%) 21.5 20.8 19.6

FCF 101 96 83

FCF Marg (%) 7.8 7.5 6.7

CAPEX -145 -142 -137

Change in NWC -2.1 -1.7 -1.6

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A debt to equity ratio of 77% gives a WACC of 8.8%. The after tax cost of debtis calculated to 2.2%. Cost of equity has been calculated assuming a risk-free rate of2.9%, a market risk premium of 6.4% and a size risk premium of 2.3%, allaccording to PWC’ study of risk premiums. A beta of 1.21 has been calculatedusing the industry average beta of Actic and its three peers, Planet fitness, GymGroup plc and Basic Fit. Furthermore, Bloomberg’s beta smoothing process hasbeen applied. A perpetuity growth rate of 2.2% has been assumed. The sensitivityanalyses show how a change in WACC, perpetuity growth rate and EBIT-marginaffects the implied share price1.

The DCF valuation gives a target share price of 44.05 SEK in a base case,indicating an upside of 6.1%. Actic’s growth is estimated to 6.5% CAGRbetween 2018E and 2022E, of which 4.1 percentage points is attributed toacquisitions. Actic is expected to continue to acquire high-margin fitness clubs at amultiple of 3.2x EBITDA, which is in line with their average multiple paid foracquisitions between 2016 and 2017. The ability to make acquisitions at lowmultiples allows Actic to make acquisitions without having to override theirND/EBITDA roof of 3.0. However, Actic currently has a dividend of 1.2%, or 8million SEK, which will be difficult to maintain for 2019, given that they areexpected to acquire gyms for 59 MSEK in 2019E.

Margin expansion from the PT-segment and acquisitions is expected toincrease EBITDA-margins from 15.7% in 2018E to 20.8% in 2022E. Actic isexpected to grow their PT-segment from 12% of revenue in 2018E to 19% ofrevenue in 2022E, which results in a revenue growth CAGR of 18.9% in thesegment during the same period. Since the segment is expected to have highermargins than the company’s current total average margin (40% EBITDA vs 15.7%EBITDA), the EBITDA-margin is expected to increase from 15.7% in 2018E to20.8% in 2022E. Furthermore, the margins are affected by the acquisitions, as thenewly acquired companies are expected to have an EBITDA-margin of 31.6%,which is the same as the historical average margin of their acquisitions. Smallmargin improvements are also expected from benefits of economies of scale. SinceActic has the ability to acquire company’s which can easily be consolidated inActic’s existing infrastructure of apps and interactive website, the average moneyspent on software development per gym decreases. Actic is currently trading at7.3x EV/EBITDA, and is trading at an EV/EBITDA multiple of 3.7x for 2022E.Given a share price of 44.05 SEK (implied by the DCF valuation) Actic would betrading at an EV/TTM EBITDA ratio of 7.6x.

In a bull case scenario, the DCF valuation indicates a target share price of48.27 SEK, which gives an upside of 16.3% from the current market price.The bull case scenario assumes a PT-share of 21% (as opposed to 19% base case)of revenues in 2022E, which is a result of the recent changes to wellness grants,which had a more positive effect than initially expected. The expected revenuegrowth CAGR of the PT-segment during 2018E to 2022E is 22.7%. Furthermore,Actic is expected to continue with the same level of acquisitions as in the base case,which gives a total revenue growth CAGR of 7.1%, of which 3.6% is attributed toacquisitions. As a result of the high margin PT-segment and the high margins ofthe acquired health clubs, the total expected EBITDA-margin for 2022 is 21.51%.

In a bear case scenario, the DCF valuation indicates a target share price of31.68 SEK, which gives a downside of 23.7% from the current market price.In the bear scenario, the effect of changes to wellness grants in Sweden has asmaller effect than anticipated. Thus, the PT-segment is only expected to have a15% share of revenue in 2022E, which gives a revenue growth CAGR of 10.7%between 2018E and 2022E in the segment. Furthermore, the PT-segmentexperiences margin contraction as the competitiveness in the segment increases. Asa result, the EBITDA-margin for 2022E is 19.6%, and the top line growth CAGRis 4.1% for 2018E-2022E. Moreover, as the market continues to consolidate, theprice of gyms is expected to increase, from the average multiple paid in 2016 and2017 of 3.18x EBITDA to the average price paid in 2017 of 3.65x EBITDA.

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15%

17%

19%

21%

23%

0

500

1 000

1 500

2020E 2021E 2022E

Bull case (MSEK)

Revenue EBITDA

EBITDA-margin

15%

17%

19%

21%

0

500

1000

1500

Bear case (MSEK)

Revenue EBITDA

EBITDA-margin

15%

17%

19%

21%

0

500

1000

1500

2020E 2021E 2022E

Base case (MSEK)

Revenue EBITDA

EBITDA-margin

1Appendix 1

MANAGEMENT

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Göran Carlson (2 191 780 shares)ChairmanCarlson holds an MBA and has up until recently been thechairman of the listed company Haldex. As of today, he is thevice chairman of Svenskt Tenn and a member of the board inthe listed companies Haldex and Björn Borg.

Stefan Charette (1 896 511 shares)Member of the boardCharette holds a MSc in financial mathematics and is the formerCEO of the listed investment companies Creades and Öresund.He currently works as the CEO of his own investment company,Athanase Industrial Partners Ltd.

Christer Zaar (12 921 shares)CEOZaar holds a master of laws and has a long experience from thehealth and fitness sector. Most recently he worked as CEO forthe corporate health care company Previa.

Jörgen Fritz (2500 shares)CFOFritz holds an MBA from Stockholm School of Economics. Hehas previously worked as CFO forseveral unlisted companies inSweden, such as the retatil company Filippa K and the pharmacychain Medstop.

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SWOT-ANALYSIS

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1

2

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STRENGTHS

Cyclical stability

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2

3

Market position

Price influence

Brand

Scalability

Management

WEAKNESSES

High competition

Historical performance

R&D

Marketing

Expansion

Demographic trends

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3

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2

3

OPPORTUNITIES THREATS

International expansion

Market expansion

Margin-expansionSynergies

AcquisitionsProduktion

Management

Political decisions

Margin contraction

Legal

Low organic growth

Increased competition

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APPENDIX I

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0.2% 1.2% 2.2% 3.2% 4.2%

10.8% 16.6 20.8 25.9 32.4 40.8

9.8% 22.3 27.6 34.3 43.0 54.8

8.8% 29.3 36.2 45.2 57.4 74.9

7.8% 38.3 47.5 60.1 78.2 106.4

6.8% 50.0 63.0 81.7 110.7 162.1

9.6% 10.6% 11.6% 12.6% 13.6%

10.8% 13.1 19.7 25.9 32.7 39.3

9.8% 19.3 27.0 34.3 42.2 49.9

8.8% 27.5 36.6 45.2 54.7 63.8

7.8% 38.6 49.6 60.1 71.7 82.8

6.8% 54.5 68.4 81.7 96.2 110.1

Weighted average cost of capital

Risk free rate 2.9%

Market risk premium 6.4%

Size premium 2.3%

Cost of debt 3.8%

Tax 26%

Debt to equity ratio 0.77

WACC 8.80%

EBIT-margin

WA

CC

Perpetuity growth

WA

CC

Sensitivity analysis

APPENDIX II

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MSEK 2018E 2019E 2020E 2021E 2022E

Revenue 992 1 086 1 178 1 266 1 279

EBITDA 155 193 226 259 266

EBITDA-marg (%) 15.7 17.8 19.2 20.5 20.8

EBIT 57 93 120 147 148

EBIT-marg (%) 5.8 8.5 10.2 11.6 11.6

D&A -98 -101 -108 -115 -142

Change in NWC -8.8 -9.4 -11.7 -11.1 -1.7

CAPEX -95 -121 -131 -141 -142

Acquisitions -25 -59 -62 -59 0

FCF 29 5 21 40 96

FCF-margin (%) 2.9 0.5 1.8 3.2 7.5

FCF growth (%) -82.8 320.0 90.5 140.0

DISCLAIMER

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