Survival of the fittest: wealth from the health business

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The Independent Online

Never before have so many people yearned to be healthy. Their driving ambition to have finely tuned bodies has created an industry which could improve the wealth of many a wise investor.

Never before have so many people yearned to be healthy. Their driving ambition to have finely tuned bodies has created an industry which could improve the wealth of many a wise investor.

It was not so long ago that health clubs simply did not exist. Gyms, often temporary and poorly equipped, were largely the haunt of boxers, weight lifters, wrestlers and assorted hangers on.

Nowadays health clubs are a rapidly growing segment of the leisure industry. Besides highly sophisticated gyms, they invariably include swimming pools, saunas, badminton, squash and tennis courts as well as such necessities as eating and drinking facilities.

I'm not a health club person, so I cannot, with any authority, discuss their success in improving fitness. But they certainly seem to have acquired a healthy ability to lighten their members' wallets.

With approaching a dozen companies now quoted with a combined capitalisation of £1.3bn, the health and fitness industry could soon qualify for its own stock market sector.

Competition, as is to be expected in any young and growing business, is fierce. And, besides battling among themselves, the stand-alone health club companies have to contend with the undoubted muscle of local authority gyms and the health facilities provided by employers. Then there are hotel chains, such as De Vere, where health and fitness is regarded as an important part of the overall operation.

Whitbread may have lost its taste for beer and pubs but its appetite for health clubs (as well as hotels and restaurants) is growing ever stronger. Its David Lloyd chain is undoubtedly a major force and is one of the areas earmarked to soak up the group's future attention.

The booming health business is still in its infancy and there is clearly considerable scope for expansion, in this country and overseas.

Despite its rapid growth it is estimated that on the domestic front only 5 per cent of the adult population now use health clubs. In the next three years this figure is expected to grow to up to 9 per cent. Stockbroker Teather & Greenwood is currently forecasting average earnings per share growth of 32 per cent for next year and 33 per cent for 2002 for the five main operators.

Mind you, as in any fledgling industry, there have been disasters. And it is clearly not recession proof. But T&G analysts Mark Reed and Nigel Popham observe: "We believe the industry is now more resilient than before, given that health and fitness is becoming more ingrained in our everyday lives and therefore other expenditure is likely to be cut before the club membership..."

Establishing an up-market - or even a more modest value-for-money - club is an expensive exercise. Most are leased with the obvious dangers of rent reviews squeezing margins.

Fitness First, the biggest stand-alone chain with 110 clubs and 236,000 members, is expected to have sweated out profits of £11.7m in the year just ended. This year's out-turn should be around £18.7m with £27.3m next year.

It was started by Christopher Pearce (chairman) and Michael Balfour (managing director) only eight years ago. The shares were floated at 80p; they are now 1,127.5p, having touched 1,450p in the Spring.

Even at their slimmed-down price the shares are not cheap. They are selling at more than 50 times expected earnings and there does not appear to be any chance of a dividend payment for some years.

T&G regards them as a hold. Say Messrs Reed and Popham: "Although the shares are at a substantial premium to the market, there is further upside in the medium term, providing the company continue to meet their ambitious growth targets."

T&G hangs buy signs on LA Fitness (266p); Cannons (113.5p) and Dragons Health (177.5p).

My own favourite - as a non health club person - is Springhealth, born out of the Mazaran Leisure business. In what was a reverse takeover, Mazaran paid the equivalent of an astonishing £1,900 per member when it acquired the eight Springhealth clubs. But it was in a sense a reverse take-over with the vendors accepting much of the consideration in loan stock and shares.

It is the smallest quoted player, with a capitalisation of only £15.3m. Although lacking the muscle of its rivals it may well be nimble-footed enough to become an intriguing growth company.

The shares, bumping along at a 104p low, are obviously a gamble, not only on the health craze continuing but on the ability of Sandy Anderson, who is behind the company, to grow the business successfully.

Almost certainly corporate activity will play an increasing role in the industry. Cannons, with its shares at a year's low, is regarded as vulnerable.

As in any field, the smaller fry should be wary of the big players.

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