Is Guzman y Gomez becoming the next Chipotle a tall order?

Guzman y Gomez lists on the ASX on Thursday with a $2.2bn market value. Picture: iStock

It’s the largest quick service restaurant to list in Australia, and owners will be hoping for a better result than some floats in recent years, namely those by private equity.

When KFC operator Collins Foods listed in 2011, shares crashed to about $1.10 shortly after floating at a price of $2.50 by Pacific Equity Partners (the share price is now $9.16).

This is unlikely in the case of Mexican food chain Guzman y Gomez.

It has just upsized the size of its IPO to $335.1m, from $242.5m, due to strong demand.

But, whether this float — involving what seems like an enormous $2.2bn market value — is really different to others which seem overvalued won’t really be known until about two years from now when it becomes evident whether the company can achieve the earnings predictions set out in its prospectus.

Hungry Jack’s founder Jack Cowin agrees, saying the owners of Guzman y Gomez have built a business quite successfully in Australia.

“The jury is out as to where it will go internationally,” he says.

Guzman y Gomez started in 2006 and has grown from 60 restaurants in 2015 to 210 since, including 185 in Australia.

It thinks it can open 30 new restaurants a year and increase that to 40 in five years in Australia, with the opportunity to add 1000 restaurants domestically over the next 20 years.

It is taking a “measured approach” to expansion in the United States, while other target growth markets are Japan and Singapore.

Mr Cowin says the business is highly valued (at 32.6 times forecast earnings before interest, tax, depreciation and amortisation forecast for 2025) on the basis it will continue to grow in Australia.

But, he points out that Taco Bell has failed three times in the Australian market, which may cast some doubt on its ability to expand to higher volumes.

A key question, he says, is what is the size of this market for its offering? And, can it continue to open more stores and maintain its earnings growth?

The group will make its debut on the Australian Securities Exchange on Thursday after promoting its comparable sales growth at 7.4 per cent this financial year following 15 per cent in the previous corresponding year and 18.2 per cent the year before that.

Growth is expected to be 4.8 per cent in the next financial year.

The EBITDA has moved from $29.3m in fiscal 2023 and is set to hit $43m for the current financial year and $59.9m the year after, when it is expected to have 225 restaurants in Australia — both corporate- and franchisee-owned.

But, it is making a statutory loss.

Around 2018, Guzman y Gomez, now chaired by ex-McDonald’s Australia boss Guy Russo, was handed a $44m lifeline from private equity firm TDM, which will hold 26.2 per cent of the company once listed.

It lost $1.6m the year before and breached a Bank of Queensland debt covenant, with overall loans of $1.9m.

Its fortunes also changed when Magellan Financial purchased an 11.6 per cent stake in 2020 for $86.8m, then valuing it at about $1.2bn or $867m excluding debt.

Magellan sold to a Barrenjoey fund for at least $140m two years later.

It has overcome the challenge quick service restaurants like itself and Mad Mex often face — struggling to secure the capital to expand beyond about 60 stores.

The listing of Mediterranean restaurant chain CAVA last year in the United States was a key test of investor appetite for fast-growing companies which are still unprofitable, and the statutory loss-making Guzman y Gomez will be the same.

Investors in the past two years have been more interested in companies with strong cash flow and profits than growth.

The float of Guzman y Gomez will be the largest this year at $22 per share and key shareholders have escrow arrangements in place until 2025.

Whether it’s the next US-based Chipotle Mexican Grill is another story, but it’s not to say it can’t be.

But, Chipotle was profitable and had 450 restaurants when it listed 18 years ago with a $US1.4bn market value.

Last year, it had 3187 restaurants with compound annual growth of 11.8 per cent and its market value is now over $US90bn.

Yet, CAVA had 263 restaurants when it listed last year and had a market value of $US5.4bn even though it was unprofitable.

A key difference is it had grown by acquisition, buying Zoe’s Kitchen in 2018 for $US300m.

But, it predicted a 16 per cent rate of compound annual store growth last year on its listing and its market value since almost doubled.

Still, Guzman y Gomez will have to sell a lot of burritos to justify its numbers.

– Additional reporting by The Wall Street Journal