Guzman y Gomez shares rocket 36% on IPO day

The quick service restaurant operator is having a stunning first day on the ASX boards.

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Guzman y Gomez Limited (ASX: GYG) shares have started life as a listed company with an almighty bang.

After commencing trade at midday with an IPO listing price of $22.00, the quick service restaurant (QSR) operator's shares opened 36% higher at $30.00.

Investors don't appear fazed by some analysts declaring the Mexican food chain as expensive compared to peers Collins Foods Ltd (ASX: CKF) and Domino's Pizza Enterprises Ltd (ASX: DMP).

Nor are they bothered by concerns over how Guzman y Gomez treats its lease liabilities or the mixed track record for private equity IPOs.

Guzman y Gomez shares have strong start

Judging by the way that Guzman y Gomez shares have burst out of the gates, it seems that investors are buying into management's growth plans.

Guzman y Gomez's revealed that its growth strategy is centred around new restaurant openings in Australia, existing restaurant sales growth, margin improvement, digital initiatives, and international growth.

In respect to the former, the company advised that new restaurant openings in Australia are expected to be the primary contributor to its network sales growth over the long term. It believes there is an opportunity to grow its network to more than 1,000 restaurants in Australia over the next 20+ years. This compares to the 185 restaurants that it operates across the country today.

Supporting this expansion is its belief that it has substantially built the team, restaurant pipeline, and infrastructure to be able to open 30 new restaurants per year over the near-term. It also sees scope to increase this to 40 new restaurant openings per year within 5 years.

Management also sees the United States as a growth opportunity given the large size of its QSR market.

However, it is taking a measured approach to its expansion in the United States and anticipates opening up to three additional corporate restaurants in the Greater Chicago region in FY 2025. It currently operates four restaurants in the country.

But management has warned that while it believes there is a large growth opportunity in the United States due to the size of the market, it will continually assess and adjust the pace and extent of new restaurant expansion having regard to the financial and operational performance of existing restaurants. After all, there is significant competition in the QSR industry and existing players in the same space, such as Chipotle (NYSE: CMG), already have significant brand equity and large footprints.

Earnings forecasts and sky-high valuation

It is fair to say that Guzman y Gomez has very skinny margins at present.

For example, in FY 2023, it reported revenue of $259 million and a profit after tax of $3 million, representing a profit margin of 1.16%.

In FY 2024, revenue is expected to increase to $339.7 million with a profit after tax of $3.4 million. After which, revenue of $428.2 million is forecast for FY 2025, with a profit after tax of $6 million. The latter will mean a profit margin of just 1.4%.

But that isn't putting off investors, which are valuing the company at $3 billion. This gives it a staggering forecast FY 2025 PE ratio of 500x.

It certainly will be interesting to see how the company and its shares fare in the coming years once the IPO magic wears off.

Motley Fool contributor James Mickleboro has positions in Collins Foods and Domino's Pizza Enterprises. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Chipotle Mexican Grill and Domino's Pizza Enterprises. The Motley Fool Australia has recommended Chipotle Mexican Grill, Collins Foods, and Domino's Pizza Enterprises. 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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