One of the most highly anticipated initial public offerings (IPOs) is set to hit the ASX with fast-growing Mexican quick service restaurant (QSR) chain Guzman Y Gomez set to list on the 20th of June.

IPOs on the ASX have had a mixed track record, with some companies experiencing meteoric success while others have struggled to live up to expectations. Notable IPO successes in years gone by include Domino’s Pizza Enterprises Ltd (ASX: DMP), which has delivered exceptional returns (despite recent troubles) since listing in 2005, and Afterpay Ltd (now Block, NYSE:SQ), whose disruptive buy-now-pay-later model propelled its share price to dizzying heights before being acquired.

However, for every success story, there are cautionary tales of companies that failed to capitalise on their public debut, such as Dick Smith Holdings, which collapsed into administration just two years after its IPO.

Companies often pursue an IPO to raise capital for expansion, acquisitions, or debt reduction, while also providing an exit opportunity for founders and early-stage investors to cash in on their investments. The decision to go public is a significant milestone, as it subjects the company to increased scrutiny, regulatory requirements, and the demands of public shareholders. When evaluating an IPO, investors must carefully analyse the company’s financials, growth prospects, competitive landscape, and management team, as well as the valuation and pricing of the offering.

The hype surrounding high-profile IPOs can sometimes lead to inflated valuations, making it crucial for investors to maintain a disciplined approach and avoid getting caught up in the frenzy.

So, should you think about GYG?

The Company

A Mexican-inspired QSR with a current network of 210 restaurants across Australia, Singapore, Japan and the US, GYG prides itself on the use of fresh, high-quality ingredients and offers a “100% Clean” menu with no added preservatives, colours, artificial flavours, or unacceptable additives.

The company operates a diverse range of restaurant formats including drive-thrus, strips, food courts, and university campuses. While taking its lead from other popular Mexican QSRs like Chipotle (NYSE: CMG) in the US, GYG attempts to differentiate itself with a stronger emphasis on using fresh ingredients and its diverse range of restaurant formats and ordering channels catering to different consumer preferences.

GYG looks to recreate a vibrant, fun restaurant design inspired by Mexican and urban street culture.

Details of the Deal

GYG’s offer price is $22.00 per share, valuing the company at an eye-watering $2.2 billion.

The proceeds will primarily fund the expansion of GYG’s Australian restaurant network from the current 185 stores to a targeted 1,000 stores over the next two decades. As a comparison, McDonalds (NYSE: MCD) had 1,043 stores in Australia as of April 2024.

The company had announced it was floating 10.9% of the business raising proceeds of $242.5 million. It has since increased that to $335.1 million with TDM Growth Partners reducing its stake from 29.7% to 26.2% following an additional sell-down of $92.6 million. The supplementary sale by TDM Growth Partners brought on by interest from Capital Research Global Investors, a major global investor in QSR chains committing to subscribing for shares at the offer price.

As part of the float, key backers TDM Growth Partners and Barrenjoey Capital will partially cash out, with co-founder Steven Marks retaining a 9.9% stake valued at $192 million.

Financial Performance & Valuation

GYG is projecting some impressive revenue growth, bringing with it a lofty valuation.

The company’s Pro Forma revenue forecast is $339.7 million for FY2024, with it estimated to grow to $428.2 million in FY2025. Operating earnings are projected to increase from $29.3 million in FY2023 to $59.9 million in FY2025. The IPO values GYG at an enterprise value to operating earnings multiple of 32.5 times, significantly higher than Domino’s Pizza at around 18 times and Collins Foods Limited (ASX: CFK) at just over 14 times.

This rich valuation has raised concerns, especially when compared to the global fast-casual Mexican chain Chipotle, which trades at a multiple of 45 times despite its stronger growth and brand recognition.

However, a controversy has emerged around GYG’s treatment of lease liabilities in its valuation. Critics argue that by excluding $210 million in lease costs from its operating earnings calculation, GYG can present a much higher estimate of 2025 operating earnings in an attempt to justify a richer valuation multiple. Properly accounting for leases could result in GYG being valued significantly higher on an earnings before interest and tax (EBIT) or a price to earnings ratio.

This has raised questions about the accuracy of GYG’s valuation in the IPO prospectus, which many be considered misleading.

The TAMIM Takeaway

While GYG’s growth ambitions are impressive, investors would be wise to approach this IPO with caution.

The rich valuation in comparison to other QSR players raises questions about whether the hype surrounding the offering is justified. The controversy around GYG’s treatment of lease liabilities, which could significantly understate its true leverage if properly accounted for, adds further uncertainty. History has shown that many high-profile IPOs struggle to live up to their lofty expectations once the initial excitement fades. Rather than getting caught up in the frenzy, prudent investors may be better served by waiting on the sidelines to see how GYG’s growth story unfolds as a public company. Only then can the true merits of the business be evaluated without the distortions of IPO pricing and promotions.

A cautious “wait-and-see” approach could pay dividends for those seeking to invest in GYG for the long haul.