Guzman Y Gomez Ltd (ASX: GYG) shares jumped significantly on Friday after the company announced it was shuttering its US operations, but at least one broker thinks there's still more value to be had.
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Prescient analysis
RBC Capital Markets issued a research note to its clients on Thursday – a day before the GYG announcement – which actually considered what would happen if the company decided to exit the US.
The market reaction to GYG's announcement indicates that RBC's theory was on the money.
RBC said in a follow up note on Friday:
On the US exit, we published a US exit scenario yesterday (relating to FY28) where we highlighted +15% upside potential to FY28 NPAT. The potential impact to FY27 from the exit on an underlying basis (ignoring exit costs) on our base case assumptions could be a +20% increase to FY27E NPAT, and could raise our NPAT CAGR FY25 – FY30 from 45.4% to 47.7%. We view the exit as a positive.
RBC said they believed the US business had "very low" prospects of success, "and the losses of the business were weighing down the earnings of the group so the sooner exit than anticipated is positive''.
Astoundingly RBC did not believe the US operations would break even until FY37.
Long growth runway
On a brighter note, they believe the Australian operations have plenty of upside, while they are sceptical about the company's goal of 1,000 restaurants over time.
They said in their original research note:
Our data science team (RBC Elements) performed a proprietary white space analysis to identify a potential 1,339 additional restaurants in Australia today. We apply sector knowledge and stricter cutoffs to population density, and see a ~550-650 additional restaurant opportunity, which should grow alongside population growth over time. We still do not believe prospectus forecasts for AU restaurants (1,000+) will be achieved by 2045, however consensus (VA: 969) now sits below this target and discounted cash flows are less sensitive to outer-year store count forecasts.
GYG also said on Friday that its operations in Singapore and Japan were performing well.
The company said:
In Singapore and Japan, our master franchise partners continue to deliver strong sales growth and healthy unit economics. Both markets are planning new restaurant openings in the next 12 months, with Singapore opening its 24th restaurant earlier this week.
RBC said while there were no detailed numbers on these operations, the sentiment was positive.
RBC has a price target of $22 on GYG shares, which delivers some slight upside to the company's current share price of $19.81.
