Guzman Y Gomez Ltd (ASX: GYG) shares are having a poor session on Wednesday.
In afternoon trade, the quick service restaurant operator's shares are down over 2% to $30.25.
Why are Guzman Y Gomez shares falling?
Investors have been hitting the sell button today possibly in response to a bearish broker note out of Goldman Sachs.
According to the note, the broker believes that the burrito maker's shares were still overvalued despite falling heavily from their 52-week high of $45.99.
This is because it thinks that the company's store rollout plans are overly ambitious and the market is being too optimistic on it growing to 1,000 stores in Australia. It said:
The fundamental driver of Guzman's long-term value proposition is the targeted store roll-out increasing to 40 stores pa and a long-term target of 1,000 stores in Australia. While early progress is on track, we remain of the view that a consistent, elevated and accelerating store roll-out in Australia of this size remains overly optimistic given the limited precedent in the Australian market and inherent challenges in Australia's development landscape.
There are three reasons why the broker believes this. It explains:
1) Expanded Development application (DA) timelines and requirements impacting approval times; 2) Slowing productivity with dwellings completed per hour worked having declined 53% since FY95; and 3) Construction industry specific challenges centered on a shortfall of workers and increasing business insolvencies. If these challenges continue to impede industry developments, rents and capex for new store builds will continue to increase, in our view, which may impact the ROI of incremental stores.
Time to sell
In light of the above, the broker has reiterated its sell rating and cut its price target on Guzman Y Gomez shares to $29.00 (from $33.60).
While this only implies potential downside of 4% from current levels, the broker sees better value elsewhere. It currently has buy ratings on both Collins Foods Ltd (ASX: CKF) and Domino's Pizza Enterprises Ltd (ASX: DMP) with price targets of $10.00 and $37.30, respectively.
Commenting on its sell recommendation, the broker concludes:
We adjust our Npat for FY25/26/27E from A$16.7/29.8/45.9m to A$15.8/28.4/44.6m, primarily driven by lower USA earnings. Our valuation is based off a blended (50/50) 10-year DCF (WACC 9.2%; TGR +4.0%; RfR +3.5%; A$29.79) and EV/Ebitda Multiple (33x time-weighted FY25/26E; A$28.90) valuation methodology. For us to turn more positive, we look to an acceleration in Australian Board approved sites, implementation of supportive development policies and positive momentum in US operations.
