Guzman y Gomez\u2019s IPO generates buzz, reminiscent of Nuix in 2020
\nThe question is whether the IPO price of $22 is too high
\nStockhead reaches out to Webull Australia\u2019s CEO, Rob Talevski, for his views<\/p>\n
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The upcoming Guzman y Gomez (ASX:GYG)<\/strong><\/span> IPO on Thursday June 20 is generating a level of excitement not seen since, perhaps, the Nuix (ASX:NXL)<\/a><\/strong> listing in 2020 or the Afterpay<\/strong> listing in 2016.<\/p>\n Word on the street is that demand for GYG\u2019s shares are so high that some investors are only getting about 10% of their desired allocations.<\/p>\n According to our sources, the IPO is seeing massive interest from both retail and institutional investors as the company works toward finalising these allocations.<\/p>\n 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.<\/p>\n \u201cIt\u2019s been no different for the ASX, where 2023 only saw $1.1b of capital raised across 45 listings,\u201d said Rob Talevski, CEO of Webull Australia.<\/strong><\/p>\n \u201cThis is significantly down on the ASX\u2019s five-year average of $5.4b across over 100 listings per annum.<\/p>\n \u201cAs such, it\u2019s 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.\u201d<\/p>\n \u00a0<\/p>\n Guzman y Gomez has been carving out a remarkable path in the food industry since opening its first outlet in Sydney in 2006.<\/p>\n 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.<\/p>\n The company has built its business model around offering customers Mexican-inspired, clean food, with a strong emphasis on quality ingredients.<\/p>\n 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.<\/p>\n 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.<\/p>\n The company asserts that this ambitious expansion strategy supports its valuation exceeding $2.2 billion.<\/p>\n GYG also prides itself on its dual approach to ownership, which includes both company-owned and franchise-operated models.<\/p>\n Recognising the importance of the franchise model, GYG maintains a very healthy median Return on Investment of 51% for its Australian franchisees.<\/p>\n The company\u2019s 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.<\/p>\n \u201cGYG 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,\u201d said Talevski.<\/p>\n \u201cBut, there is the everyday observer\u2019s question of, how can a burrito-slinging outfit create this much value?<\/p>\n \u201cSo naturally there will be some trepidation from investors around the idea of backing a franchise that extrapolates such rapid growth in a prospectus,\u201d he added.<\/p>\n \u201cAfter all, how many burritos can Australians really eat, and how will the franchise defend competition with such low barriers to entry?<\/p>\n \u201cAnd 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?\u201d said Talevski.<\/p>\n \u00a0<\/p>\n In the Australian Quick Service Restaurant (QSR) market, competition is highly fragmented.<\/p>\n The top five brands \u2013\u00a0McDonald\u2019s, KFC, Hungry Jack\u2019s, Domino\u2019s, and Subway \u2013\u00a0<\/em>account for roughly half of the industry\u2019s sales according to research firm, Morningstar<\/em>.<\/p>\n GYG has established its own niche by targeting a younger demographic with a focus on healthy dining options.<\/p>\n Because of its higher-quality offerings, customers tend to spend about 15% more per transaction at GYG outlets compared to other major chains.<\/p>\n 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\u2019s and KFC in Australia.<\/p>\n But overseas, GYG could be facing challenges with its international expansion plans.<\/p>\n Its restaurants in Japan and Singapore operate under a master franchise agreement, and only contribute about 2% to EBITDA during normal business conditions.<\/p>\n The US stores, meanwhile, are currently losing money, and it\u2019s unlikely they\u2019ll turn a profit in the near future.<\/p>\n \u00a0<\/p>\n Morningstar also pointed out that despite GYG\u2019s promising growth, it has yet to establish an economic moat<\/strong> in the cut-throat restaurant industry.<\/p>\n Morningstar\u2019s moat rating is a measure of how strong a company\u2019s competitive advantage is. So when a company is assigned \u201cno moat,\u201d it suggests that it lacks significant competitive advantages or barriers that would protect it from competitors.<\/p>\n Morningstar believes GYG\u2019s success hinges on maintaining strong store-level economics, which could be challenging amid its ambitious expansion plans and international ventures.<\/p>\n \u201cThe restaurant space is highly competitive. Switching costs are nonexistent for patrons, and barriers to entry are relatively low.<\/p>\n \u201cWe 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\u2019s.\u201d<\/p>\n While GYG\u2019s growth potential is recognised, Morningstar believes there are more attractive investment opportunities on the ASX.<\/p>\n These include peers such as Domino\u2019s Pizza (ASX:DMP)<\/a> and Collins Foods (ASX:CKF)<\/a> \u2013 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.<\/p>\n In terms of valuation, Morningstar also suggests caution.<\/p>\n \u201cOur fair value estimate for GYG is $15 per share. Against this, the $22 offer price is too high.\u201d<\/p>\n \u00a0<\/p>\n GYG plans to issue a total of 11.1 million shares at $22 each, aiming to raise approximately $335.1 million<\/a> for an initial market cap of around $2.2 billion.<\/p>\n 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.<\/p>\n Key institutional investors such as Aware Super, Cooper Investors, <\/em>and Hyperion Asset Management<\/em> have expressed support, along with existing shareholders like TDM Growth Partners<\/em> and Barrenjoey Private Capital<\/em>.<\/p>\n There are obviously some big names on that shareholder list which have been\u00a0influential advocates for the company\u2019s business model and valuation, says Talevski.<\/p>\n \u201cSo 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?\u201d he said.<\/p>\n The proceeds from the IPO will be used to fuel GYG\u2019s growth strategy, primarily focused on expanding its corporate restaurant network in Australia.<\/p>\n Co-founder and CEO Steven Marks<\/em> has recently reaffirmed GYG\u2019s plans to grow its Australian network to over 1,000 restaurants, comparable to McDonald\u2019s, over the next two decades.<\/p>\n \u201cWe truly believe that fast food doesn\u2019t have to be bad food,\u201d said Marks.<\/p>\n \u201cWe 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.\u201d<\/p>\n Many analysts however have raised doubts about the company achieving this ambitious goal.<\/p>\n \u201cAs we saw with the NYSE listing of fitness franchise F45, it\u2019s one thing to plan growth on paper, and another to execute in the real world,\u201d said Talevski.<\/p>\n And whether long-term performance lives up to expectations will take years to prove, he added.<\/p>\n However, for now, Talevski says he\u2019s keeping a keen eye on whether investors will pay up for future growth and remain invested to see the stock stabilise post-IPO.<\/p>\n \u201cShould 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.\u201d<\/p>\n \u00a0<\/p>\n 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.<\/em><\/p>\n Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.\u00a0<\/em><\/p>\n The post IPO Watch: Is Guzman y Gomez\u2019s ambitious growth story spicy enough for investors?<\/a> appeared first on Stockhead<\/a>.<\/p>","protected":false},"excerpt":{"rendered":"Should potential investors consider jumping in?<\/h2>\n
The competitive landscape<\/h2>\n
Valuation too high?<\/h2>\n
What will happen post IPO?<\/h2>\n