Send a burrito to the GYG naysayers

Send a burrito to the GYG naysayers

We recently wrote about the then-upcoming Guzman y Gomez (ASX:GYG) float. That post and its associated social media mentions engendered some polarized views. Curiously, perhaps the bullish camp was filled with those who eat and enjoy Guzman y Gomez’s products. Those who thought the burritos missed the mark assumed the initial public offering (IPO) would do likewise.

Meanwhile, one media outlet in particular, appeared to have its own vendetta against the company, its executive team and its backers.

Today however, at 4:15pm, the market rested its case. Shares in the Mexican restaurant chain surged, closing at exactly $30 per share, a one-day gain of 36.36 per cent for those institutional managers, that secured a vastly scaled-back number of shares at $22 in the IPO.

The gains were never certain, but several factors were in its favour. First, it was the largest IPO in a decade, the first decent-sized float in about three years, and the only float in the pipeline for now. Of course, its success may change that now, with investment bankers likely to be fielding calls from private equity owners of unlisted companies who had hitherto been waiting for the right conditions to jump on the IPO bandwagon.

The second factor in its favour is that management have demonstrated an ability to roll out highly profitable stores quickly. By way of example a company owned drive through costs $2 million to establish and generates $1.1 million of annual earnings. That’s a 55 per cent return on capital, which is a number that would cause Warren Buffett to salivate over, even if the burritos didn’t.

In FY15, Guzman y Gomez produced $101 million in global network sales. Eight years later in 2023 sales had grown almost 30 per cent per annum to $759 million.

Third, management is planning for an acceleration in store openings. The company plans to add 30 stores per year in the next few years, increasing that to 40 store openings per year within five years. There are already 95 sites in Guzman y Gomez’s pipeline, and this is a significant uplift on the 185 stores already operating in Australia.

Combine the profitability at the store level with the numbers of stores expected to open, and the current valuation might not seem as egregious.

Fourth, and given the above, the IPO was reported to have been 20 times oversubscribed.

Fifth, with more companies being taken over and delisted from the ASX, than being listed anew, the ASX is becoming a bit of a desert when it comes to investible growth stories.

Sixth, the shares in this growth story were scarce. Despite now being a $3 billion business, just $335.1 million was being raised, and only $200 million was needed to fund future growth. There were no shares available to the public at all and the float had already been fully subscribed by the cornerstone fund managers. These guys were scaled back to provide some stock to other managers, who were then champing at the bit for more, and left scrambling for the stock after 12 noon today, when the shares began trading.

While the road ahead will have its inevitable bumps – all bets are off if China blockades Taiwan – this is a growth story worth watching.

The Montgomery Small Companies Fund own shares in Guzman y Gomez. Interests associated with the author own shares in Guzman y Gomez as at the date of the article. The author’s views on the security/ies may change over time. This article was prepared 20 June 2024 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Guzman y Gomez, you should seek financial advice. 

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Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.