Can Guzman y Gomez hang on to the high price of it’s $2.2bn debut

The Tex Mex upstart says it has cracked the secret sauce for success but with shares set to be more expensive than Domino’s, will investors get bang for their big bucks?

Guzman y Gomez is pushing with a stock market listing that is likely to be valued at $2.2 billion.

Known for spicy tacos, the Tex Mex themed Guzman y Gomez is putting much-needed fire into Australia’s stalled stock listings market.

But will its burritos give investors bang for their buck?

Although the planned raising is small at just over $242m, with current backers holding onto their stake, the fast food upstart is priced to have some heft with a market capitalisation, coming in at about $2.2bn on its debut.

The relative scarcity of its shares available to outside investors will certainly help to keep a floor under the price, but at $22 each, it’s a high-priced stock.

Indeed, at these levels it makes Guzman one of the most expensive quick service restaurants in the world, with shares priced well ahead of local rivals Domino’s Pizza as well as KFC and Pizza Hut franchise owner Collins Food. In relative terms it will be one of the most expensive plus $1bn stocks on the ASX.

Steven Marks, right, and Brett Hilton, are co-CEOs of Guzman y Gomez.

And with an expected price to earnings ratio of around 37 times next year’s pre-tax earnings, this puts Guzman miles ahead of global giant McDonald’s (22 times) or US giant Yum! Brands (24.6 times). The Weekend Australian has used the more generous EBITDA measure for Guzman. On the current year, Guzman’s price to earnings runs into a sweltering 51 times.

PE is just but one measure, but other signs point to high pricing. This includes Guzman’s enterprise value to EBITDA ratio of 32.5 times, also puts it on top of the table. The company that is not yet 20 years old will be priced for perfection.

Guzman argues that its fast-paced growth (and tender tacos) deserve to carry a premium with all the extra chilli. ASX-listed Domino’s trades at just over 27 times next year’s earnings and Collins at 14 times, suggesting their best growth days are increasingly behind them.

Where pizzas and burgers might be well saturated, Guzman argues it is carving out a relatively new market in Australia. And its growth plans are certainly ambitious.

The bulk of its sales come from 185 restaurants in Australia. It plans to build this up to more than 1000 over coming decades. Guzman, that operates both corporate and franchisee-owned restaurants, is targeting a near-doubling of pre-tax earnings over two years to $60m in financial 2025.

It believes it has cracked the secret sauce for new openings having built the team, a restaurant pipeline and the infrastructure to open 30 new restaurants annually over the next few years.

It wants to increase this at an opening rate of 40 restaurants per annum within five years. Rapid fire store openings are how Domino’s was able to dominate the market quickly. This contrasts with rivals like McDonald’s, KFC or even Domino’s that have slowed their pace of store openings.

It is this current momentum that is helping Guzman pull market share (from a low base) against bigger rivals, including Hungry Jack’s and Pizza Hut. Domino’s stumbled late last year, but a revamp of its menu built around value has now seen it reverse the market losses.

Guzman too believes there is opportunity for growth offshore. It currently operates 16 stores in Singapore, five in Japan and four in the US. Indeed, the US is a market it wants to build out further, with it still testing the model in Chicago.

Guzman too has a stable management with co-founder Steven Marks running the business and chairman Guy Russo is a former top McDonald’s and Kmart executive.

Cooling stock market?

However, the earlier-than-expected timing of the listing - now slated for June 20 - suggest Guzman’s bankers believe there is a narrow window to float before a possible market cooling.

The offer is fully underwritten by Guzman’s bankers Barrenjoey and Morgan Stanley, which means it will get the proceeds away.

Worrying inflation numbers this week point to interest rates being high for longer. And this is just as bad for stock markets, as well as people eating out. Guzman reckons its low-priced foods puts it in the value space, while the cost of living bites.

Investor interest in fast-food is coming off the boil. Collins Food operates twice the amount of stores than Guzman under the KFC brand but with half the market capitalisation of just over $1bn.

Guzman y Gomez shares will come with a premium as it prepares for its stock market debut.

Collins has the Taco Bell franchise in Australia, which it wants to expand, putting it in competition with Guzman. Domino’s has seen its shares fall sharply back to earth coming out of the Covid-pandemic, where it once carried the valuation of a hyped tech stock. A profit warning from Domino’s in January saw its shares collapse more than 30 per cent in a single session.

More broadly, the Aussie share market is clearly losing momentum, showing the interest rate outlook is starting to weigh. Earnings downgrades are starting to drift into the market and when Guzman lists it will sit firmly in the unloved retail sector.

Australia’s notorious IPO fade will be another factor many will consider. Of the largest IPO’s since 2019, only two - Viva Energy and Dalrymple Bay are trading above their offer price. Big name stock market hopefuls, like Latitude, Pexa, Nuix and Judo are all trading in the red.

Investors are hungry to take a bite of the IPO market again, but they have proved to have very discerning taste.

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Originally published as Can Guzman y Gomez hang on to the high price of it’s $2.2bn debut