Like the chart above? If you did, you might be interested in other quick service restaurant (QSR) companies in the market that could experience similar performance in the coming years. Fortunately, we have one right round the corner with the upcoming IPO of Guzman y Gomez (ASX:GYG) which is set to trade on the Australian Securities Exchange by the 25th of June at $22 per share.
From the onset, I’m happy to set the record straight: my personal opinion is that I will definitely want exposure to GYG in my portfolio as I recognize its long-term potential. However, the question remains as to when and at what price. This article explores the aspects of the company that attract me, as well as the factors compelling me to exercise restraint despite my enthusiasm.
The Australian QSR Market
I’ve gone through the GYG Prospectus, which you can find here. Without going too deep, here are 3 things to note:
The Australian QSR Market has seen growth of approximately 3% year on year, with this figure set to increase to as high as 5.9% in the next 5 years. This indicates that GYG is operating in a market where demand is overall robust and continued growth is expected.
GYG’s market share has been increasing steadily over the past few years. They have 2x their market share based on net restaurant openings from 1.6% in 2020 to 3.5% in 2023.
In terms of net restaurant openings by brand, GYG continues to stand out amongst other competitors in the QSR industry, second only to KFC and Sushi Hub.
Based on the information above, it is reasonable to argue that GYG is operating in a growth industry and is emerging as a leader within this sector. While these factors do not guarantee success, they strongly suggest that GYG is on the right track.
Valuation: What does $22 a share get you?
Not much can be inferred from the prospectus; however, based on publicly available information, here are some numbers for comparison.
| Company | EV/EBITDA (at present) |
Store Count in AU (est.) |
| Guzman y Gomez | 76x | 185~ |
| Domino’s | 17.25x | 730~ |
| Collin’s Foods | 10.16x | 760 KFC~ |
| Chipotle | 45.59x | 3500~ Globally |
While it is difficult to ascertain if GYG will grow into this valuation in the future, what is certain is that at present, its valuations are premium.
Analyst Expectations by Morningstar
At the time of writing, Morningstar has initiated coverage of the GYG IPO. While they acknowledge promising early signs, they note that there is “no Moat yet” despite a strong presence for GYG in Australia. As such, the valuation guidance from Morningstar is as follows:
Fair Value Estimate of $15 per share
– This implies an adjusted fiscal 2025 EV/EBITDA ratio of 26 and a P/E ratio of 250.
– “While Guzman’s valuation multiples look excessive on fiscal 2025 earnings compared with peers, they reflect the earlier stage of Guzman’s rollout story. We see Guzman differently, with the story centered on rapid growth and strengthening and monetizing an emerging brand.”
Narrow moat Estimate of $19 per share
– “If we valued Guzman with a narrow moat and extended the period of rapid store growth by five years, our valuation would be $19 per share.”
Wide Moat Estimate of $22.50 per share
– “A wide moat, which would assume an additional 10 years of rapid store growth, would see our valuation lift to $22.50.”
Industry Opinions
Sydney-based TAMIM Asset Management said Guzman y Gomez’s rich valuation in comparison to other quick service restaurant players raised questions about whether the hype surrounding the offering was justified … History has shown that many high-profile IPOs struggle to live up to their lofty expectations once the initial excitement fades … Rather than getting caught up in the frenzy, prudent investors may be better served by waiting on the sidelines to see how GYG’s growth story unfolds as a public company.
THE NIGHTLY: Sydney-based TAMIM warns investors to approach Guzman y Gomez’s $2.2b float with caution
It has a great brand, excellent unit economics, large store rollout plan, strong board, one of the most profitable franchisee opportunities in Australia… And at the same time, no net debt. It’s a great starting point.
CEO Firetrial (Early backer of GYG): Should you buy Guzman y Gomez shares when they list on the ASX?
In Australia, we normally see IPOs priced on a multiple of earnings per share or net profit basis, but in GYG’s case it expects only $3.4 million net profit in FY24 and $6 million next year (on a pro forma basis) that’s about a 370-times FY25 pro forma profit number.
AFR’s Chanticleer: Guzman y Gomez float a bet on a maverick founder and his grand plans
4 Reasons Why My Interest in GYG Remains.
1. Founder-led company with long growth runaway
Who doesn’t like a founder-led company? Research has proven that founder-led companies do better over time. Not to assume that one should go all-in simply because founder Steven Marks is steering the ship, but I trust the data.
“Reuters’ data shows that the top 400 founder-led companies have registered an average share price gain of 58.4% compared to just a 10% return for the top 400 stocks led by other companies.”
2. Economic Moat
While Morningstar research suggests that GYG lacks an economic moat, I disagree. Based on my close interactions with Gen Z staff that I work with, it’s evident that GYG holds a dominant position as they are always the first thought that comes to mind when it comes to Mexican food in Singapore. Despite the extremely crowded QSR industry, GYG has carved out a significant market share. They have cultivated a dedicated community following, which in my opinion is an early sign of a strong moat developing.
3. Strong Sales Growth + Improving Margins
How accurate are these expectations and predictions? GYG is forecasting that global network sales can increase to $954.4 million in FY24 and $1.14 billion in FY25, projecting an impressive growth of around 50% between FY23 and FY25.
While it’s easy to make optimistic forecasts, GYG’s has demonstrated an impressive ability to grow, having increased their revenue 7x from $101 million in 2015 to $759 million in 2023. This historical performance suggests that their targets for the next two years could be within reach.
4. Food is Yummy and they are always crowded #funfact
One can only trust what they see and to this extent, GYG is always crowded in Singapore. Have you been to the one at Ocean Financial Center? Try having lunch there between 11-1pm and you’ll feel like you’re in a warzone.
Once again, not to assume that all outlets globally are crowded (Australia/Japan), but at the very least, I like the brand and I like their food, which to me is more than enough to spark an interest in the performance of the overall company.
Join the queue but take caution at the cashier
By all means, get your food at GYG, but when you’re at the counter, spend within your means and don’t simply splurge on everything on the menu. This applies to investing as well; I’m happy to join the queue, but I’m far (and never will) from going “all-in” on this stock.
Bearing in mind the listing valuations, in my opinion, there is no need to rush. But on a longer-term horizon, I think that this company has the potential to someday be as successful as Chipotle.
For those looking to start trading on the ASX, here are some brokerages that offer access to the Australian markets: IBKR, Saxo, and Tiger.
p.s. if you want to learn how to analyse and find the best stocks to buy, Alvin shares our strategy at this live webinar.