Guzman y Gomez soars 36% on ASX debut: Here's everything you need to know

Guzman Y Gomez (ASX: GYG) might be one of the most polarising IPOs in recent history, earning both widespread popularity and significant criticism.

The $2.2 billion IPO represents one of the largest listings in 11 months and a much needed addition for the rapidly shrinking ASX – in the past month alone we've seen Silver Lake merge with Red 5 and CSR officially taken out by France's Saint-Gobain.

The burrito business will list at a cool price-to-earnings (PE) of 550 and an enterprise valuation of 32.5-times pro forma EBITDA for the next financial year. To add some perspective, a peer like Domino's Pizza trades at a PE of 97.

Against all odds, GYG shares opened 36% higher to $30.00 at 12:00 pm AEST.

IPO at a glance

• Offer price: $22.00 per share

• Franchisee offer price: $18.00 per share

• Total proceeds from the offer: $335 million

• Indicative market cap: $2.23 billion

• Top 20 shareholders own 85.71%: Led by TDM (28.23%), Barrenjoey (10.36%), founder Steven Marks (7.41) and Aware Super (6.07%)

• Enterprise value/FY25 EBITDA: 32.5x

• Use of proceeds: Proceeds will be used to fund new restaurant openings over the coming years, largely in Australia and disciplined investment in the US. In FY25, GYG expect to invest approximately US$35.2 million in their Australian restaurant network and approximately $13.9 million in the US network

Why the hate

Everyone from the AFR to analysts on LinkedIn have been bashing the IPO. I'll summarise some of the key points below.

Valuation: GYG is valued at 32.5x forecast FY25 EBITDA. For perspective, competitors like Collins Food trade at 5.1x FY25e EBITDA and Domino's Pizza at 10.1x, according to Citi.

Pre-IPO raising: GYG quietly raised $135 million in a pre-IPO funding earlier this year, which valued the business at $18 per share or $1.76 billion. Six months later, the business is somehow worth 25% more.

Lease liabilities: The earnings metrics in the prospectus ignores the company's lease liabilities (the second largest cost after employee expenses). This amounted to $208 million at 31 December 2023 and expected to trend higher as more stores open. While the 32.6x valuation might sound expensive – the real number is somewhere closer to 50x.

An IPO for existing holders: There was no general public offer for the IPO. It was instead comprised of a broker firm offer, priority offer, employee offer and franchisee offer. This means that a big chunk of the raising will go directly to existing shareholders and advisors, so they'll get a nice payday.

Other considerations: GYG attempted to slot the business to private equity, the business is loss making (-$2.3 million loss in FY23 and forecast to widen to $16.2 million in FY24), founder Steven Marks "admitted that the entire story behind the history of GYG’s brand and logo was completely fabricated and false," Australian consumer confidence has been sitting near Covid and GFC levels.

Defying expectations

Despite all the above, GYG opened 36% higher to $30.00. More often than not, the day-one performance of an IPO focuses more on hype than on fundamentals. And as far as I can tell, there was plenty of hype.

According to the AFR, the IPO was 20 times oversubscribed. To put that into perspective, the company wanted to raise $335 million and institutional investors would have fronted up as much as $6.7 billion.

Approximately 55 million shares (or 54% of shares outstanding) will be subject to voluntary escrow, which leaves a relatively small pool of shares to trade among keen investors.

When you combine all these factors – no general public offer, a heavily oversubscribed IPO, the largest listing in almost a year and a tightly held register – you create a rather demand-inducing environment that'll drive the share price higher.

Where to from here

More often than not, IPOs experience a massive day-one performance that tends to taper off as investors shift their focus from near-term hype to longer-term fundamentals.

GYG's prospectus plans to open more than 1,000 stores (currently 185) in Australia over the next 20 years but its medium-term plans include opening 30 new restaurants per annum, increasing to 40 stores per annum within five years.

The prospectus guided to the following numbers over the next two financial years.

The revenue and EBITDA growth over FY24-25 averages 28.6% and 43.0% respectively.

Of course, the business will need to deliver such numbers well into the future. And only time will tell.