Analysts warm to Guzman Y Gomez despite spicy valuation

Wilsons Advisory is the latest broker to initiate research on the Mexican-themed fast food chain, giving it an Overweight rating and 12-month share price target of $32.

20/06/2024. Steven Marks, Founder and Co-CEO. ASX listing of Guzman y Gomez at the Sydney Stock Exchange building in Sydney. Britta Campion / The Australian

Analysts are warming to Guzman Y Gomez and its spicy share market valuation.

Wilsons Advisory has become the latest broker to initiate research on the Mexican-themed fast food chain, giving it an Overweight rating and 12-month price target of $31.98 a share.

Morningstar analyst Johannes Faul kicked things off with a Sell rating and $15 target on July 1st.

But last week Billy Bouton at Morgans Financial gave GYG an Add rating and $30.80 target.

It’s still early days but it seems analysts are warming to Guzman Y Gomez, or as Wilson’s James Ferrier calls it “the Big Burrito of Mexican QSR (quick-service restaurants)”.

With the Australian fast food industry still dominated by Mcdonald’s, KFC, Hungry Jack’s and Domino’s Pizza, Mr Ferrier has been “enthused” about the market opportunity in Australia for a Mexican quick-service-restaurant for some time.

“GYG has established a domestic store network with very attractive unit economics and sufficient scale to support expectations of a significant and successful full store rollout,” he said.

Importantly, GYG was “well-funded and well-resourced” to pursue its expansion strategy.

Wilson’s positive investment thesis centres on GYG’s outlook for significant and sustained earnings growth, underpinned by three core pillars.

Ferrier said GYG’s unit economics were “very attractive”, boasting average store sales of $4.7m per annum and a comparable store margin of 21 per cent.

That gave the company a “robust platform from which to build scale via new restaurant openings”.

He also said the popularity of Mexican cuisine had broadened across the Australian consumer base in recent years such that he saw an attractive opportunity in the QSR market for GYG with its “clean, made-to-order, Mexican inspired food.”

In terms of the funding and resources that GYG needs to expand, Wilsons’ Mr Ferrier pointed to the significant amount of cash on its balance sheet and the fact that it had invested heavily in supporting infrastructure to enable a rapid store rollout program.

GYG’s general & administrative expenses as a percentage of network sales were currently over 7 per cent but are expected to fall progressively to 3 per cent by the 2040 financial year.

Mr Ferrier’s forecasts for financial 2024 and 2025 were broadly in line with the IPO Prospectus.

His assumptions included Australian new restaurant openings increasing to 38 by 2029 and 784 by FY2040. Same store sales for that segment were expected to grow 4.5 per cent per annum until FY2030, then moderate to 2.5 per cent. GYG’s restaurant margin was expected to hit 19.3 per cent by FY2020 before contracting to 18.5 per cent by FY40 because of a higher marketing levy.

As for what could lead to GYG shares to underperform, his main concern in the short term was the potential for a weakening economy to hit consumer spending, causing it to miss the IPO Prospectus FY25 forecast for same-store sales growth of 4.8 per cent. For the medium term, a lack of suitable sites for new restaurant openings in Australia was a key risk in terms of meeting site selection criteria.

In the first weeks of trading since listing on June 20th, GYG shares zoomed from an IPO price of $22 to a high of $30.99 on day one, then dipped to $24.04.

It was trading on an FY24 enterpirse value to EBITDA ratio of about 48.6 times.

GYG shares closed down 4.8 per cent at $27.49 on Tuesday.

Originally published as Analysts warm to Guzman Y Gomez despite spicy valuation