Should you buy shares in Guzman y Gomez when it lists on the ASX?

Guzman y Gomez's IPO will be a blockbuster ASX event.

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ASX investors love a good initial public offering (IPO). And we just might get to see one of the biggest ASX IPOs in years when Mexican fast food chain Guzman y Gomez floats on the Australian stock exchange later this month on 20 June. But should ASX investors buy Guzman y Gomez shares as soon as they can?

IPOs are exciting, there's no question about it. It's interesting to see how the public markets value a company when the shares float for the first time. Plus, it's always worth getting the popcorn out to watch the usual share price rollercoaster upon a stock's ASX debut.

As we touched on yesterday, Guzman y Gomez is hoping to raise around $242.5 million by floating 11.1 million shares priced at $22 each.

By selling these Guzman y Gomez shares, the company is planning on funding an aggressive expansion across Australia. If Guzman indeed succeeds at this IPO pricing, it will see the company command a market capitalisation of $2.2 billion.

As a comparison point, Kentucky Fried Chicken (KFC) operator Collins Foods Ltd (ASX: CKF) currently has a market cap of $1.07 billion.

Unlike many ASX IPOs, retail ASX investors won't have the opportunity to buy shares directly before the IPO. Instead, we'll have to wait until Guzman y Gomez shares are trading on the secondary markets (under the ticker 'GYG') before we can pick up shares for ourselves.

However, Guzman reportedly already has "considerable support" from existing institutional investors like Aware Super, Firetrail Investments and Hyperion Asset Management. These early and institutional investors, as well as Guzman's board and management, are still expected to own around 62% of the company post-IPO.

Should ASX investors buy Guzman y Gomez shares at IPO?

So we know when and how all ASX investors will soon be able to buy Guzman y Gomez shares. But let's talk about whether they should.

Well, one ASX expert has already been sold on Guzman y Gomez shares and will be upping his stake once the company IPOs. As we mentioned above, Firetrail Investments was an early backer of Guzman. But its chief Patrick Hodgens recently told the Australian Financial Review (AFR) that he can't wait to double down:

It has a great brand, excellent unit economics, large store rollout plan, strong board, one of the most profitable franchisee opportunities in Australia… And at the same time, no net debt. It's a great starting point.

Hodgens told the AFR that Firetrail looks at a dozen pre-IPO companies every year, but normally chooses just one to invest in. This year, that one is Guzman y Gomez. Hodgens also stated that he likes Guzman's co-CEO model, as well as the company's shift to drive-throughs and strip stores.

However, not everyone is as excited about this IPO.

The AFR's Chanticleer argues that Guzman at $22 a share is "priced for high growth" as it represents "32.5-times earnings on an enterprise value to pro forma FY25 EBITDA basis". It goes on to state that "that's a rich multiple". Here's why:

In Australia, we normally see IPOs priced on a multiple of earnings per share or net profit basis, but in GYG's case it expects only $3.4 million net profit in FY24 and $6 million next year (on a pro forma basis) – that's about a 370-times FY25 pro forma profit number.

Foolish takeaway

Every ASX IPO usually has both cheerleaders and detractors and the float of Guzman y Gomez shares is no different, it seems. Regardless of the arguments on both sides, we'll have to wait until the shares hit the ASX to truly find out which story investors are buying.

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Collins Foods. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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