Portfolio Manager, Chris Scarpato, is interviewed on the re-opening of the domestic IPO market with the listing of Mexican fast-food chain, Guzman Y Gomez.
Guzman Y Gomez has opened approximately one store a month on average since their Surry Hills founding in 2005. The company needs to increase this to almost one new store a week to achieve their ambitious growth plans to rival McDonald’s ~1,000 stores in 20 years (a feat that took McDonald’s over 50 years).
In light of elevated construction and operating costs, increased regulation and challenges in securing appropriate sites, we believe the odds are against GYG.
– Chris Scarpato, Alvia Portfolio Manager
Nonetheless, the IPO saw plenty of hype, with the stock rallying 36% on the day, giving the sub-200 store fast-food chain an eyewatering $3 billion valuation.
At an implied valuation of ~40 times 2025 EBITDA, management execution needs to be impeccable, otherwise there presents material downside risk. On a risk-adjusted basis, we’re comfortable waiting this opportunity out to see if management can prove themselves in the unforgiving listed equities environment.
In the meantime, on a relative basis, we see a compelling opportunity in Domino’s Pizza Enterprises, which trades at less than half the valuation and has a proven track record across a number of markets.