The Guzman Y Gomez Ltd (ASX: GYG) share price is $29.24, down 0.58%.
The S&P/ASX 200 Index (ASX: XJO) is down 0.028%.
Blackwattle Investment Partners says Guzman Y Gomez's current valuation and risk/reward profile "looks highly attractive".
Here's why.
Guzman Y Gomez share price lower on Thursday
Guzman Y Gomez is a Mexican-themed restaurant network in the quick service restaurant (QSR) category.
The company opened its first restaurant in Newtown, Sydney, in 2006, and now there are more than 220 of them in four countries.
Guzman Y Gomez listed on the share market at $22 per share last year.
In its latest quarterly report, Guzman Y Gomez reported total network sales growth of 23.6% to $289.5 million for 3Q FY25.
Comparable sales growth in the Australian segment was 11.1%, a result that Blackwattle characterises as a "standout globally".
Blackwattle said Guzman Y Gomez is on track to beat its prospectus forecasts for FY25.
Mid-Cap Quality Fund portfolio managers Tim Riordan and Michael Teran commented:
GYG is leading the modernization of QSR in Australia providing an option at scale for consumers balancing quality, health and fast service.
GYG has built a brand in Australia that now supports a ~200 store network forecast to grow by 30+ stores per annum, stores in Singapore & Japan and in its infancy, trialing stores in the US.
Profitability for GYG franchisees is as healthy as the food, driving strong demand as they roll out new stores in AAA rated site locations.
What drove recent share price weakness?
Over May, the Guzman Y Gomez share price lost 5.53%. In June, the stock is down a further 4% so far.
Riordan and Teran put this down to two elements.
The first is market sentiment, following a weak performance by QSR peers, including Chipotle, Cava, and Sweetgreen, in the US.
The second is "the looming overhang" of the risk of a sell-down by founders and early investors after the escrow expiry in August.
The owners and some investors put their holdings under voluntary escrow when Guzman Y Gomez listed.
A portion of 25% was held under escrow until the company released its first half-yearly results in February.
The remaining 75% are locked up until Guzman Y Gomez releases its full-year results for FY25 in August.
Blackwattle says the risk of the owners or early investors selling some of their stake has now been priced in.
They said:
We believe the current sell down overhang has been more than priced-in with almost 10% free float short interest and compensated by the attractive starting valuation multiple and continued operational execution.
What's the verdict?
Riordan and Teran said Guzman Y Gomez has a bright future if its franchise model continues to be executed well.
This would bode well for the Guzman Y Gomez share price.
Riordan and Teran see an opportunity for investors to buy Guzman Y Gomez shares at today's "highly attractive" price.
They said:
When well executed, scaling a franchisee business model can be a powerful driver of economic value, delivering incredible financial outcomes over the medium term.
Whilst we view GYG as an 'Early Quality' business, we see significant upside if the business model is executed at scale and the current valuation and Risk/Reward opportunity looks highly attractive.
