Benefit Systems: Sore muscles are not an injury (stays BUY)

We maintain our BUY rating on Benefit Systems, with a new price target (PT) of PLN 930/share (from PLN 1,150), implying 54% upside potential. We remain admirers of Benefit Systems’ unique business model (90% market share among sport cards operators, 30% of all fitness members in Poland) and its growth potential (the business could double in 5Y in its existing markets), although we are aware that developments in the fitness segment have not gone as planned. We note the recent profit warning, but believe the subsequent 50% share price drop was caused by a miscommunication, rather than a change in Benefit’s business model or investment story. We admit that there is likely to be a short-term hit to earnings, driven by: i) too much M&A (76 of the 171 clubs it owns were acquired in the past 2Y); and ii) a too-rapid fitness clubs’ rollout (49 of its clubs opened organically in the past 2Y). We do not believe the long-term prospects should be affected, however. We consider that the problems in fitness are temporary, and manageable in the long term. After a poor 2019E (+20% in revenue, flat EBITDA) we expect the group to post 2019-21E CAGRs of 16% in revenue and 19% in EBITDA, and generate enough cash to finance growth, maintenance capex and reward shareholders (dividends, share buybacks). We believe our estimates are conservative, but admit that management’s credibility has been affected, and could take a couple of quarters to rebuild.