IPO Life Time Group: Time to Relax, Don’t Invest (NYSE: LTH)

IPO initial public offering 3d concept

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Lifetime group (NYSE: LTH) saw a public offer that was not well received. The timely offer from private equity owners has made investors cautious as the company has not yet fully recovered from the pandemic; it It still trades at huge multiples and takes a large amount of debt, despite the proceeds from the offer.

Empower a happy and healthy life

The Life Time Group was founded thirty years ago with the goal of creating happy and healthy communities, guided by a focus on large size, reach, quality, architecture and design to entertain families. The services offered at these resorts include yoga, swimming, fitness, spa, classes, workout, food, tennis, and relaxation, among others. Basically every center is a combination of health, wellness and fitness.

A culture of care employed by 30,000 team members has been behind the success of these centers, including a wide range of services and facilities. About 1.4 million individual members, represented by over three quarters of a million full members, visit these centers regularly. The company currently has approximately 154 centers in 29 US states and a Canadian office.

The rush to the business has been nothing short of surprising and impressive. With a business of only $ 94 million in 2000, the company experienced very steady growth every year until 2019, even during the 2008/2009 crisis, after which revenues were halved again in 2020, of course. The decline in revenue in 2020 was largely held back due to subscription revenue, which was sticky and not so much tied to actual business, as this revenue source accounts for roughly two-thirds of total revenue. The scale of activity and use of these facilities is enormous, with average member income exceeding $ 2,000 in 2019.

Ratings and IPO thoughts

Life Time Group’s management and underwriters aimed to sell 46.2 million shares in a preliminary price range of $ 18 to $ 21 per share, but the price was set at the lower end of the range. This resulted in the company raising $ 832 million in gross income. These proceeds are very much needed as the company operated on $ 2.23 billion of net debt prior to the offering, as I believe the pro forma net debt is around $ 1.5 billion.

With 198 million shares outstanding, the company’s net worth is valued just over $ 3.5 billion, for a pro forma company valuation of $ 5.0 billion at the offering price.

The company generated sales of $ 1.75 billion in 2018, on which an operating profit of $ 196 million was recorded. Revenue grew further to $ 1.90 billion in 2019, but operating profits fell to $ 168 million due to a faster rise in the spending base, especially rents. Of course, 2020 was a sad year with revenues halved to $ 948 million, as a huge $ 359 million operating loss was reported. The first half of 2021 showed a noticeable improvement in operations, but still a little below the 2019 execution rate.

Revenue for the first half of the year increased 17% to $ 572 million as a reduction in expenses allowed for a slight improvement in operating losses. Losses shrank nearly $ 50 million to $ 139 million, still a substantial loss. Promising was that the second quarter was already a little better with reported revenues of $ 323 million and reported losses of approximately $ 57 million.

As the company is still in recovery mode, the shares have not seen a strong debut. The stock fell to $ 17 and changed in the first few days of trading, reducing the valuation to around $ 4.8 billion, as this valuation obviously includes some net debt.

If we look at 2019 as a normal execution rate, we have a company that could see sales of around $ 2 billion and operating margins of around 10% under normal conditions. If this is realistic and we apply 4% of the cost of debt to the net debt load, plus a tax rate of 20%, net income of $ 112 million comes to $ 0.55 per share.

However, these calculations were based on good conditions, as we are still a long way from achieving and publishing these gains, of course. After all, equity is valued at 30 times earnings in a normal year, which is a year not yet seen, as leverage is obviously very high in the meantime.

Concluding thoughts

I like the concept as this is clearly not a fitness game, but much more a more diverse health and wellness game. The company already has a rather large membership base which is quite active, as the biggest risk in the short term remains pandemic-related trends.

The competition comes from a variety of other places as many health and fitness clubs are also improving the quality of their services, as the large number of services provided by Life Time means that some users may opt for a subscription to specialized services as well. This is certainly if other operators also have targeted and high quality offers.

That said, the evaluation discussion above makes me very cautious. While the company may return to its 2019 results, and a little more, the company trades around 30x profits while still being fairly leveraged based on its perceived quality ownership position. In light of all of this, I find this to be an easy step, as it feels like a timely offer, recognized by market participants given the lackluster reception the shares have received.

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