Mexican restaurant chain IPO may be turning point for Australia’s market

By Thomson Reuters Jun 19, 2024 | 5:02 PM

By Byron Kaye

SYDNEY (Reuters) – After two years in deep freeze, Australian investors will be looking for signs the initial public offerings market is thawing as fast-growing Mexican restaurant chain Guzman Y Gomez serves up the country’s biggest IPO in 11 months.

The Sydney startup puts up A$335.1 million ($223.4 million)of new stock, about one-sixth of the company, for trading on Thursday.

In its listing prospectus, the company forecast a second consecutive net loss for 2024 but a profit in 2025 and hopes investors back its plans to match the current Australian store count of McDonald’s in 20 years.

Guzman Y Gomez’s (GYG) initial issue was closed to the public and largely involved selling shares to existing financiers and franchise owners. How the shares perform will send a signal about broader sentiment after high interest rates and inflation squashed demand through 2022 and 2023.

Australian listings collapsed after a record 2021 as pandemic stimulus payments ended and the central bank raised interest rates to slow inflation. In 2024 so far, Australia has raised just A$98 million in IPOs, the second-lowest June half in more than a decade, according to LSEG data.

“Guzman Y Gomez will be a bit of a bellwether,” said Campbell Welch, an adviser at Novus Capital who ran a small IPO for health services provider Freedom Care in November, one of 32 new listings in the country in 2023, compared with nearly 200 in 2021.

“It’s still pretty tough to raise money but some of these things look like they’re resolving themselves. I don’t see why it can’t succeed.”

A prospectus filed in May generated rolling headlines about GYG’s target of opening at least 30 stores per year from 183 in Australia currently – a rate it has achieved just once, in 2023 – and about its omission of store lease liabilities and share-based payments from earnings projections.

The company said its accounting treatment of expenses was typical of franchise businesses.

“Once we’re listed, the market will price us every day and our focus will be on the things we can control: selling burritos and delivering on our strategy,” GYG founder and co-CEO Steven Marks said in a statement.

A Morningstar client note valued the stock at A$15 a share, below its A$22 issue price, saying the company with 3.5% of the country’s fast food market had not established a competitive advantage which would justify its rapid expansion.

Without that advantage “we are hesitant to fully bake in management’s 1,000-store long-term projection”, Morningstar analyst Johannes Faul wrote.

“The restaurant space is highly competitive. Switching costs are nonexistent for patrons and barriers to entry are relatively low.”

Sebastian Evans, chief investment officer at NAOS Asset Management, said GYG’s small share register and ambitious growth narrative may support the stock given its familiarity with Australians.

“We will follow the business and have done so for some time, but we believe the significant ramp-up in store rollout and the proposed geographic split of these new stores adds to the amount of execution risk,” Evans said.

Emanuel Datt, principal of investment manager Datt Capital, said the fact GYG considered a private sale before choosing a listing – as reported by Australian media – indicates “public markets may be falling back into favour.”

($1 = 1.4997 Australian dollars)

(Reporting by Byron Kaye; Editing by Jacqueline Wong)