Interactive Investor

Insider: multiple share purchases after small-cap names new CEO

8th May 2023 10:12

by Graeme Evans from interactive investor

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Picking a ‘proven business leader’ to drive future growth was reason for these directors to celebrate in a big way. An existing CEO at another small firm is buying up shares near a record low.

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Four directors of Gym Group (The) (LSE:GYM) have spent £150,000 backing their newly-appointed chief executive to revive the stock market fortunes of the low-cost fitness chain.

Their share buying took place after Wednesday’s disclosure that Will Orr of publishing group Times Media is to fill the role vacated in March by Richard Darwin, who had led the company since its 2015 IPO as finance boss and then chief executive.

The group went from 63 to 229 gyms nationwide during that period, but shares have halved in value over the past year as membership numbers have taken longer than expected to return to pre-Covid levels due to cost-of-living pressures and working from home trends.

These conditions and the prospect of a £10 million rise in energy costs in 2023 have led the company to be more selective on new site openings and to focus on improving profitability.

The shares closed last week at 95.8p, within sight of the low of 81.8p in mid-April and marking a swift paper loss for chair John Treharne and non-executives Emma Woods, Richard Stables and Elaine O’Donnell after their purchases between 104.7p and 107p.

Stables, a corporate financier who spent three decades working at Lazard, made the biggest investment worth £53,500 and then returned to the market on Thursday to make another of £23,700, this time at a much cheaper price of 94.9p.

The shares were priced at 195p in the £250 million flotation before the company placed new shares in July 2021 at 275p in order to raise £31.5 million towards opening 40 sites.

House broker Peel Hunt believes they have the potential to be trading at 225p, highlighting big improvements to the technology platform and pricing architecture that should mean the company is well placed for when market conditions improve.

For now, its forecasts assume limited growth in like-for-like membership after annual results showed that gyms open in 2018 were still only back at 90% of pre-Covid sales.

Membership at the end of February stood at 890,000, up 8.4% on the end of 2022 and contributing to an 18.7% year-on-year uplift in revenues. The big yield improvement followed a £2 increase in the average headline price of a standard membership to £21.49 a month.

Liberum said a reduction in churn after this latest membership upturn should help restore investor confidence in both the resilience and long-term growth opportunity.

The broker added that progress on returning to a self-financing model and reducing debt leverage will also be key in driving a re-rating.

Liberum recently cut its target price from 200p to 180p, but noted that the current enterprise value is below the construction/replacement cost of the gyms.

It said after the results in March: “We believe low-cost gym membership should remain resilient through a downturn, as gym membership has generally done in previous recessions, aided by a significant structural market share shift to low-cost, as traditional, and local authority gyms become less viable in the inflationary environment.

Sowing seed of success

The boss of Carr's Group (LSE:CARR) has spent £31,500 to back up his optimism over the medium-term prospects for the company’s speciality agriculture and engineering divisions.

Peter Page’s investment was made on Thursday after the company, which has been on the stock market since May 1972, reported a drop in adjusted profits of 23% to £5.5 million.

The agriculture division, which manufactures and supplies feed blocks to farmers in the UK, Europe, North America and New Zealand, had to deal with unprecedented input costs in the period covering the six months to 4 March.

Its revenues rose 34% to £57.1 million but volumes fell 13% as Carr’s passed through substantial raw material cost increases that have included a 70% jump in the price of sugar cane molasses over three years.

Management expects the second half to remain challenging but notes that farm input prices in the UK and Ireland, particularly for feed and fertiliser, are coming down and easing the pressure on customer spending budgets. Farmgate prices for dairy, beef and lamb are also strong, particularly when compared to 10-year historic averages.

The half-year performance in the engineering division was impacted by the phasing of contracts and completion of a long-running defence contract that has impacted margins.

Since then, however, the order book has strengthened to £57 million as Carr’s builds a well-balanced spread of contracts across its specialist fabrication, precision engineering and robotics operations in the UK, Europe and United States.

Page said this should mean a considerable step up in profits from the engineering division for the second half, offsetting the quieter summer months for speciality agriculture. He added: “The outlook for 2024 and 2025 is encouraging in both divisions.”

Shares finished the week at 128.25p, which compares with 92p in September.

Page, who was chief executive of sausage casings manufacturer Devro from 2007 to 2018 and joined Carlisle-based Carr’s in 2019, bought his shares at 123.75p. He was joined by non-executive director Ian Wood, who spent £24,886 at a price of 124.43p on the same day.

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