IPO Watch: Is Guzman y Gomez’s ambitious growth story spicy enough for investors?

Guzman y Gomez’s IPO generates buzz, reminiscent of Nuix in 2020
The question is whether the IPO price of $22 is too high
Stockhead reaches out to Webull Australia’s CEO, Rob Talevski, for his views

The upcoming Guzman y Gomez (ASX:GYG) IPO on Thursday June 20 is generating a level of excitement not seen since, perhaps… the Nuix (ASX:NXL) listing in 2020 or the Afterpay listing in 2016.

Word on the street is that demand for GYG’s shares are so high that some investors are only getting about 10% of their desired allocations.

According to our sources, the IPO is seeing massive interest from both retail and institutional investors as the company works toward finalising these allocations.

The listing comes at a time when global IPO markets have faced considerable challenges in recent years, influenced by substantial interest rate increases and ongoing high inflation levels that have impacted economies worldwide.

“It’s been no different for the ASX, where 2023 only saw $1.1b of capital raised across 45 listings,” said Rob Talevski, CEO of Webull Australia.

“This is significantly down on the ASX’s five-year average of $5.4b across over 100 listings per annum.

“As such, it’s no secret that the ASX has been waiting years for an IPO that can test whether public markets are ready for high valuations; and enter centre stage, Guzman y Gomez.”

Should potential investors consider jumping in?

Guzman y Gomez has been carving out a remarkable path in the food industry since opening its first outlet in Sydney in 2006.

Steven Marks, now CEO, and Robert Hazan, a childhood friend from New York, co-founded the company. Hazan currently serves as a non-executive director.

The company has built its business model around offering customers Mexican-inspired, clean food, with a strong emphasis on quality ingredients.

Fast forward to today, GYG boasts 185 restaurants in Australia alone, with a global footprint extending to 210 locations across Singapore, Japan, and the US.

It has plans to open 30 new restaurants by FY25, and aims to increase this to 40 annually within five years. Drive-thru outlets will be a particular focus.

The company asserts that this ambitious expansion strategy supports its valuation exceeding $2.2 billion.

GYG also prides itself on its dual approach to ownership, which includes both company-owned and franchise-operated models.

Recognising the importance of the franchise model, GYG maintains a very healthy median Return on Investment of 51% for its Australian franchisees.

The company’s impressive growth trajectory speaks for itself, with global network sales climbing from $101 million to $759 million between FY15 and FY23, and projected to reach $1,138 million by FY25.

“GYG has laid out a doubling of EBITDA from FY23 to FY25, and forecasts new restaurant openings at a rate far higher than it has experienced historically,” said Talevski.

“But, there is the everyday observer’s question of, how can a burrito-slinging outfit create this much value?

“So naturally there will be some trepidation from investors around the idea of backing a franchise that extrapolates such rapid growth in a prospectus,” he added.

“After all, how many burritos can Australians really eat, and how will the franchise defend competition with such low barriers to entry?

“And as cost of living pressures prompt consumer belt-tightening and producer inflation remains unpredictable, can GYG really replicate the success it has had at scale?” said Talevski.

The competitive landscape

In the Australian Quick Service Restaurant (QSR) market, competition is highly fragmented.

The top five brands – McDonald’s, KFC, Hungry Jack’s, Domino’s, and Subway – account for roughly half of the industry’s sales according to research firm, Morningstar.

GYG has established its own niche by targeting a younger demographic with a focus on healthy dining options.

Because of its higher-quality offerings, customers tend to spend about 15% more per transaction at GYG outlets compared to other major chains.

As a result, GYG has achieved impressive average unit sales volumes of approximately $4 million per store, according to the prospectus, which is comparable to top performers like McDonald’s and KFC in Australia.

But overseas, GYG could be facing challenges with its international expansion plans.

Its restaurants in Japan and Singapore operate under a master franchise agreement, and only contribute about 2% to EBITDA during normal business conditions.

The US stores, meanwhile, are currently losing money, and it’s unlikely they’ll turn a profit in the near future.

Valuation too high?

Morningstar also pointed out that despite GYG’s promising growth, it has yet to establish an economic moat in the cut-throat restaurant industry.

Morningstar’s moat rating is a measure of how strong a company’s competitive advantage is. So when a company is assigned “no moat,” it suggests that it lacks significant competitive advantages or barriers that would protect it from competitors.

Morningstar believes GYG’s success hinges on maintaining strong store-level economics, which could be challenging amid its ambitious expansion plans and international ventures.

“The restaurant space is highly competitive. Switching costs are nonexistent for patrons, and barriers to entry are relatively low.

“We also think Guzman is likely to struggle to achieve a meaningful presence in the US against well-established and strong competitors both within the Mexican niche, like wide-moat Chipotle, and McDonald’s.”

While GYG’s growth potential is recognised, Morningstar believes there are more attractive investment opportunities on the ASX.

These include peers such as Domino’s Pizza (ASX:DMP) and Collins Foods (ASX:CKF) – the operator of KFC and Taco Bell in Australia. Both these stocks are trading at significant discounts to their fair value, says the research firm.

In terms of valuation, Morningstar also suggests caution.

“Our fair value estimate for GYG is $15 per share. Against this, the $22 offer price is too high.”

What will happen post IPO?

GYG plans to issue a total of 11.1 million shares at $22 each, aiming to raise approximately $335.1 million for an initial market cap of around $2.2 billion.

After accounting for approximately $210 million worth of shares already allocated to cornerstone investors, the shares available for the public are only around $125 million.

Key institutional investors such as Aware Super, Cooper Investors, and Hyperion Asset Management have expressed support, along with existing shareholders like TDM Growth Partners and Barrenjoey Private Capital.

There are obviously some big names on that shareholder list which have been influential advocates for the company’s business model and valuation, says Talevski.

“So much so that they have all agreed to escrow their shareholdings until the delivery of FY25 results to help calm the waters. But will it be enough?” he said.

The proceeds from the IPO will be used to fuel GYG’s growth strategy, primarily focused on expanding its corporate restaurant network in Australia.

Co-founder and CEO Steven Marks has recently reaffirmed GYG’s plans to grow its Australian network to over 1,000 restaurants, comparable to McDonald’s, over the next two decades.

“We truly believe that fast food doesn’t have to be bad food,” said Marks.

“We look forward to sharing our food with more guests across Australia and overseas as we look to realise our plans to grow the network to more than 1,000 restaurants over the next 20+ years.”

Many analysts however have raised doubts about the company achieving this ambitious goal.

“As we saw with the NYSE listing of fitness franchise F45, it’s one thing to plan growth on paper, and another to execute in the real world,” said Talevski.

And whether long-term performance lives up to expectations will take years to prove, he added.

However, for now, Talevski says he’s keeping a keen eye on whether investors will pay up for future growth and remain invested to see the stock stabilise post-IPO.

“Should it manage to do that when trading commences on the ASX, this will no doubt be a positive signal for other IPO hopefuls seeking the right window in which to list.”

The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead.

Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.