DRAFT

Physical education for women is controversial in Saudi Arabia, where conservatives consider it immodest, and it is not mandatory. It has not been offered in most public schools.

“Sports is empowerment,” said Lina Almaeena, a member of the advisory Shura Council who founded the kingdom’s first female sports club, basketball team Jeddah United. “It’s a historic announcement.”

Female gym expansions drive earnings growth

We remain Overweight on Fitness Time (Leejam) with a revised PT of SAR76.6. We believe the company’s focus on expanding in the underpenetrated female fitness industry will be a key growth driver. Moreover, personal training (PT) will further support top-line as the company introduces PT services at more gyms. Despite the changes in top management and BoD recently, we believe the growth outlook remains intact. We forecast a CAGR revenue growth of 11.9% and earnings growth of 13.5% between 2018 and 2023. Fitness Time trades at a 2019f PE of 16.7x vs. global peers average PE of 20.2x.

• Outlook remains intact despite change in management: Fitness Time's CEO, Chairman and two other Board members have resigned over the past few months. The current Chairman and founding shareholder owns a 60.5% stake in Fitness Time. Despite these changes, we believe the growth outlook remains intact. Management remains committed to the long-term plan, as reflected in the strong Q4 results and new gym openings. The company opened three new gyms YTD (1 female, 2 male). We expect an additional 12 gyms to open in 2019f (11 female and 1 male), taking the total gyms to 141.
• Focus on female fitness centres and PT to drive top-line growth: We expect revenues of Fitness Time to grow by +14.4% in 2019f to SAR914mn, as the company expands further in the female fitness industry. We expect total revenue from Fitness Time's female gyms to grow +95.8% yoy to SAR231mn in 2019 and at a CAGR of +37.9% between 2018 and 2023 vs CAGR of +3.9% for male gyms. Moreover, we expect overall PT revenues to grow at a CAGR of +14.4%, thereby supporting overall top-line growth. Overall, we expect gross margins to increase to 40.0% by 2023f vs 38.2% in 2018, driven mainly by a higher contribution from the female gyms.
• Ex-CEO announces plans to open 50 new smart gyms: Earlier this month Fitness Time's Ex-CEO, Fahad Al-Haqbani, announced his plans to open up to 50 new smart gyms in Saudi over the next five years. We believe this news remains in early stages and does not pose a direct threat on Fitness Time due to its current reach, capitalization and early mover advantage.
• Remain Overweight on strong fundamentals: We remain Overweight on Fitness Time with a revised PT of SAR76.6. Fitness Time is our top consumer pick due to its strong growth outlook, supported by female gym openings. However, we believe the end of the lock-up period on the 10th March 2019 may put selling pressure on the stock in the short-term.