The highly anticipated listing of Guzman y Gomez on the ASX received a warm response from the markets, with shares rising by one-third on their first day of trading from $22 to $30.
As of the close on June 21, the price was $28.60, which remains higher than analyst valuations.
According to Johannes Faul, Morningstar Australasia director, Guzman continues to appear significantly overvalued as markets take a differing view on its long-term prospects, especially concerning how long the company can sustain building stores that generate excess returns.
While admitting that it’s an “appealing growth story”, Faul said the “current price leaves little room for missteps”.
“Granted, Guzman’s Australian restaurant economics are very attractive now. We expect this to support a brisk store rollout for the next decade, averaging 40 net new stores per year,” Faul explained in a market note.
“But longer term, we think the potential growth from new stores will be depleted.
“To arrive at market pricing, we would need to fully bake in management’s long-term ambition to reach 1,000 stores in Australia and assume Guzman achieves midcycle store operating margins at its target range of 20 per cent, up from guidance of 17 per cent in fiscal 2024.”
Importantly, despite its strong brand presence in Australia, the restaurant chain has yet to carve out an economic moat, said Faul. He added that it will take significant evidence of Guzman's ability to maintain or grow its brand strength and store profitability for Morningstar to reconsider this thesis.
Due to its lack of an economic moat, and the fact that it is susceptible to the economic cycle, it has assigned Guzman a High Morningstar Uncertainty Rating.
“When disposable income is squeezed, consumers can always choose cheaper options, including eating at home,” Faul said.
Examining the offering more closely, Morningstar stated that its fair value estimate for Guzman is $15 per share, which implies an adjusted fiscal 2025 EV/EBITDA ratio of 26 and a P/E ratio of 250.
The research house assumes a cost of equity of 9.0 per cent for Guzman, aligning it with domestic peers such as Collins Foods (which operates KFC and Taco Bell in Australia) and Domino's Pizza.
Moreover, Faul explained that Guzman’s “rich” valuation multiple on fiscal 2025 earnings, compared with its ASX-listed quick service restaurant peers, reflect the earlier stage of its rollout story.
“We see Guzman differently, with the story centered on rapid growth and strengthening and monetizing an emerging brand. We assume 10-year CAGRs for network sales and adjusted profit before tax of 17 per cent and 39 per cent, respectively.
“We forecast a rapid expansion of the Australian store network to account for most of the sales growth, with domestic network sales accounting for 94 per cent of the group total in fiscal 2033, virtually unchanged from current levels.”
Finally, he cautioned that as investors bet on Guzman's international expansion plans, significant contributions from its operations in the US market remain "many years away."
He said: “As a rule of thumb, a successful brand takes about a decade to reach a footprint of 100 stores in the US. Entry there is likely to be far more challenging than the rapid and successful growth in Australia so far, given Australia was a virtual blank canvas for Mexican-inspired food. The US is much more competitive and has numerous established options.”
GYG’s listing was first announced on 3 June with an expected market cap of $2.2 billion.
The firm was formerly backed by Magellan but it sold its 11 per cent stake for $140 million in May 2022. At the time, the manager said it would allow Magellan to focus on its core fund management activities. Magellan’s then head of capital and advisory, Craig Wright, also resigned from GYG’s board where he had been a non-executive director.
GYG has 210 stores across four countries including 185 in Australia. Between FY15 and FY23, its global network sales increased from $101 million to $759 million, with sales expected to reach $1,138 million by FY25 supported by strong comparable sales growth and ongoing network expansion.
