Barron's : These Two European Gym Chains Could Benefit From Strong Demand Post-C

These Two European Gym Chains Could Benefit From Strong Demand Post-Covid

A trend towards keeping fit had been driving memberships across prepandemic Europe.

As the world shakes off coronavirus, the focus on staying healthy is likely to return, along with strong demand for workouts and classes. That should boost the value of two of Europe’s biggest publicly listed gym chains.

Basic-Fit (ticker: BFIT.NV) which has 828 gyms, is listed in the Netherlands, and The Gym Group (GYM.UK), which is smaller with 179, in the U.K.

The latter struck a timely deal in early February with Fiit, which provides remote classes through an app. Broker Liberum recently said in a research note that such on-demand fitness classes are complementary to gym memberships, making subscribers more likely to join a gym.

It is currently difficult to evaluate the impact on the businesses from customers who are exercising at home with equipment and online fitness classes—and if they’ll ever return to a gym.

During the pandemic both chains have been forced to close their outlets. Reopening will depend on local lockdown rules.

Basic-Fit is the European market leader in the value-for-money fitness market. It operates in the Netherlands, Belgium, Luxembourg, France, and Spain, offering what it describes as “uncomplicated, essential and effective fitness experiences” that are affordable.

The shares have steadily increased from €14.50 ($15.90) in June 2016 to €35.15 in February, slumping to €12 a month later. More recently they have improved to €24.35.

KBC Securities thinks this could increase 19% to €29. Christine Zhou, an analyst at RBC Capital Markets, wrote in a May report that Basic-Fit and The Gym Group have valuations below long-term trading ranges. She said that while the near-term disruption to the sector is significant, the crisis will strengthen the long-term trend of increased health awareness.

Basic-Fit has a market value of €1.3 billion and fetches 93.5 times this year’s expected earnings. It is valued at a significant discount to its peers.

It posted an operating profit of €42.8 million for 2019, up 35% from the year before on sales of €515.2 million. Basic-Fit offers both virtual and live group lessons, which will help insulate it against closures. Basic-Fit on Monday raised €133.3 million through a sale of new shares.

In terms of liquidity it can survive nine months of closure while he Gym Group has a 16-month buffer.

The Gym Group also operates in low-cost space and is the fourth-largest gym operator in Europe with 794,000 members. Shares have risen from 202.50 ($2.58) in November 2015 to 308 pence in January, tumbling to 95 pence in March. The stock has since rallied to 177 pence.

Broker Numis has marked it a Buy with potential to rise 74% to 308 pence.

Anna Barnfather, an analyst at broker Liberum, which has a target price of 280 pence, wrote in a recent note that “we expect the low cost, no contract, 24/7 gym offer to remain appealing with consumers” who prioritize health and fitness even with a challenging economic environment post-Covid-19.

With a market value of £293 million ($374 million) and around 2,073 employees, it posted adjusted pretax profit of £14 million for 2019 on sales of £153 million. It also raised £41.3 million in April.

The budget end of the market has been driving growth in the sector, and The Gym Group’s stock looks particularly strong because of its timely partnership with Fiit. RBC Capital’s Zhou says The Gym Group has been squeezing out the midmarket and cheaper gyms.

Either stock could add strength to a portfolio.

Barron's : Activist Investors May Be Using Market Volatility to Hide Trades

Activist Investors May Be Using Market Volatility to Hide Trades

Wall Street is widely familiar with “know your client” regulations for banks, but “know your shareholder” efforts are increasing among companies fearing that they could soon come under activist attack.

This year has been slow for campaigns, as activist investors have feared the optics of launching a proxy battle during the coronavirus pandemic. Fewer campaigns have been launched, and many of those that have were settled before coming to a vote.

Yet companies remain nervous that they’re vulnerable to future activism. There has already been an increase in poison-pill amendments by companies including Occidental Petroleum (ticker: OXY) and Dave & Buster’s Entertainment (PLAY) that are looking to protect themselves against hostile takeover bids.

Another worry is that embattled stocks could be snatched up quickly and anonymously by activists. Recent volatility, and the emergence of retail investors using online-trading platforms such as Robinhood, make it tougher for companies to know who holds their shares.

It is also crucial to know how certain shareholders behave. Some retail investors may ride momentum and quickly trade in and out of positions. Activists, however, often have more deliberate trading patterns.

“We can track who’s buying and what that means with predictive certainty,” Bruce Goldfarb, founder of proxy solicitation firm Okapi Partners, told Barron’s.

With that in mind, one can assume that there may be a more active activist season next year.

FT : Cineworld abandons $2.3bn Cineplex purchase

Cineworld abandons $2.3bn Cineplex purchase
UK-based cinema chain says Canadian group had suffered ‘material adverse effect’

Cineworld, the world’s second-largest cinema chain, called off a $2.3bn deal to buy the Canadian cinema company Cineplex on Friday saying that Cineplex had suffered a “material adverse effect”, which meant the acquisition could not go ahead.

Under the terms of the deal, the sale would not proceed if Cineplex breached a level of $725m debt. When it last reported figures in February, Cineplex had net debt of $625m.

Cineplex claimed that it had not breached the sale agreement and “that a material adverse effect has not occurred”. The smaller cinema chain also claimed that Cineworld had not complied with the requirements needed in order for the deal to receive approval from the Canadian competition authorities.

The deal had been due to complete at the end of June.

In a statement on June 1, Cineplex issued a note of caution saying there could be “no assurance” that the terms required for the deal to complete would be met.

Both chains have been hit hard by the coronavirus pandemic, which has forced cinemas to close worldwide. Cineworld has cut its dividend and executive pay, and secured an extra $110m in additional liquidity from investors.

In a note on Thursday, analysts at Fitch, the rating agency, said that Cineworld’s “large, fixed-cost base means it is burning cash and eroding its liquidity buffer”.

The UK-listed cinema group, which runs 787 cinemas worldwide, said that contrary to Cineplex’s claims it had complied with the Canadian authorities and would “vigorously defend” the allegations against it.

Reuters : U.S. senators draft plan to reform new plane design approvals after 73

U.S. senators draft plan to reform new plane design approvals after 737 MAX crashes

WASHINGTON/CHICAGO (Reuters) - Two key U.S. senators are circulating a bipartisan draft bill that would reform how the Federal Aviation Administration certifies new aircraft in the wake of two fatal Boeing 737 MAX crashes that killed 346 people.

The measure seeks to eliminate the ability of aircraft makers like Boeing Co. (BA.N) to unduly influence the certification process and marks the most significant step toward reforms following the 2018 and 2019 crashes, which sparked calls to change how the FAA approves new airplanes.

The draft, which was completed this week and reviewed by Reuters, is authored by Senate Commerce Committee Chairman Roger Wicker, a Republican, and the top Democrat on the panel, Senator Maria Cantwell.

The FAA, Wicker’s office and Boeing declined to comment on the draft bill.

It aims to grant the FAA new power over the long-standing practice of delegating some certification tasks to aircraft manufacturer employees. It would give the agency authority to hire or remove Boeing employees conducting FAA certification tasks and allow the FAA to appoint safety advisers.

One congressional aide said the bill would put the FAA “back in the driver’s seat” overseeing airplane certification.

Boeing’s best-selling plane has been grounded since March 2019 and the manufacturer faces an ongoing criminal probe and investigation by the Transportation Department’s inspector general. The largest U.S. planemaker hopes to conduct a key certification test flight late this month as it works to resume flights.

The draft bill would require reforms aimed at preventing “undue pressure... or instances of perceived regulatory coziness or other failures to maintain independence between the FAA and” Boeing employees conducting certification tasks.

It would also require regular audits and authorize $150 million over 10 years for new FAA training and to hire specialized personnel to develop technical standards for new technologies and operations.

“Congress needs to make sure aviation safety in the United States is the strongest in the world,” Cantwell said in a statement to Reuters. “Strong technical aviation expertise on the ground cannot simply be ignored by senior management at the FAA.”

The Senate Commerce Committee is holding a hearing on Wednesday with FAA Administrator Stephen Dickson to review agency oversight of aircraft certification. Aides hope to release a draft of the bill by then.

MORE OVERSIGHT
An October report by a panel of international air safety regulators raised significant questions over the certification process, finding the FAA had just 45 people in an office overseeing Boeing’s Organization Designation Authority and its 1,500 employees.
For the 737 MAX, the FAA initially delegated 40% of the certification tasks to Boeing, an amount that increased as the five-year review progressed. The panel said FAA involvement in the certification of Boeing’s MCAS flight control software, a key safety system faulted in both fatal crashes, “would likely have resulted in design changes that would have improved safety.”
The review also found “signs of undue pressure” on Boeing employees performing tasks for the FAA and said they should be able to speak “without fear of reprisal.”
The draft legislation would ensure no one could prohibit a Boeing employee from talking to the FAA and grant new whistleblower protections to workers at airplane and parts manufacturers. It would also require the FAA to create a new safety reporting system for employees to detail concerns anonymously.

PILOT BEHAVIOR
The draft bill also addresses concerns about “human factors,” saying the FAA must review and potentially modify existing assumptions on how pilots identity and respond to cockpit situations.A federal review concluded Boeing underestimated the effect a malfunction of new automated software in the aircraft could have on pilots, who were dealing with a cacophony of alerts in both 737 MAX crashes.
When certifying a new aircraft type, the FAA must address the cumulative impact new technologies may have on pilot response, consult outside experts and notify other international regulators and encourage them to make evaluations.
The draft bill was shared with aviation associations, unions and family members of those killed in the fatal Boeing crashes, seeking their input.
Michael Stumo, who lost his daughter, Samya, in the second 737 MAX crash in Ethiopia, praised the draft but called for improvements to ensure the FAA is in charge, especially overseeing “major hazardous and catastrophic systems” like MCAS.

>>> US Close Dow +1.90% S&P +1.31% Nasdaq +1.01% Russell +2.32%

Closing Stock Market Summary

The S&P 500 gained 1.3% on Friday to reclaim some of yesterday's sharp decline, although it was up as much as 2.9% early in the session. The Dow Jones Industrial Average (+1.9%), Nasdaq Composite (+1.0%), and Russell 2000 (+2.3%) also bounced back but closed off session highs. 

While yesterday's decline was orderly in nature, today's session was characterized by an inclination to sell into strength. Every time the market attempted to rebound, sellers would regain control and take the market back down. At one point in the afternoon, the S&P 500 was down 0.6% before buyers gradually returned to buy the dip. 

The S&P 500 sectors were able to finish mostly higher, with cyclical sectors assuming the leadership. The financials (+3.0%), energy (+2.7%), and industrials (+2.0%) sectors rose at least 2.0%, but it was the real estate sector (+3.2%) that advanced the most. The utilities (-0.2%) and consumer staples (-0.2%) sectors closed lower.

Adobe (ADBE 406.54, +18.87, +4.9%) was an individual standout following its earnings report, while lululemon athletica (LULU 296.36, -11.76, -3.8%) failed to generate much excitement with its results. Tesla (TSLA 935.28, -37.56, -3.9%) was pressured by Goldman Sachs downgrading the stock to Neutral from Buy. 

Interestingly, shares of bankrupt Hertz (HTZ 2.83, +0.77, +37.4%) were reawakened today with a 37% gain. The company reportedly asked a bankruptcy judge if it could sell $1 billion worth of common stock to capitalize on the trading frenzy that has buoyed its stock. 

U.S. Treasuries finished on a lower note, pushing yields higher across the curve. The 2-yr yield increased two basis points to 0.18%, and the 10-yr yield increased five basis points to 0.70%. The U.S. Dollar Index increased 0.4% to 97.11. WTI crude declined 0.5%, or $0.17, to $36.24/bbl. 

Reviewing Friday's economic data:

  • The preliminary University of Michigan Index of Consumer Sentiment for June showed an improvement to 78.9 (consensus 75.8) from the final reading of 72.3 for May.
    • The key takeaway from the report is that the uptick was driven by renewed gains in employment and an expectation for a decline in the unemployment rate; however, most consumers were not anticipating the reestablishment of favorable financial conditions anytime soon.
  • Import prices increased 1.0% in May, and prices, excluding oil, increased 0.1%. Export prices increased 0.5% in May, and prices, excluding agriculture, increased 0.6%.

Looking ahead, investors will receive the Empire State Manufacturing Survey for June and Net Long-Term TIC Flows for April on Monday.

  • Nasdaq Composite +6.9% YTD
  • S&P 500 -5.9% YTD
  • Dow Jones Industrial Average -10.3% YTD
  • Russell 2000 -16.8% YTD