It’s easy to spot when a company is preparing to go public: their brand suddenly appears on every bus stop, billboard, and TV station. So, it was no surprise last week when the Guzman y Gomez (GYG) launched their prospectus, sparking my curiosity about the hype. I quickly downloaded the document, but after a deep dive into their business fundamentals and financials, I found myself questioning whether valuation and bottom-line profitability still matter.

As expected, the prospectus was a full-on pitch of GYG’s growth potential. Their vision is ambitious: expanding from 185 Australian stores to around 1,000 in the next couple of decades. Their aim is to become as ubiquitous in Australia as their US competitor, McDonalds. Is this achievable? Maybe? I have seen Steven Marks speak and he comes across as passionate about the food and the customer experience at GYG. He is clear about what he was good at, what he isn’t and why he has a co-CEO.

However, when it came to the numbers, the prospectus was a bit of an accounting ‘choose your own adventure’. There were multiple views of each financial statement, both pro forma and statutory, with quite different outcomes. Last financial year, did they make $3m net profit after tax (NPAT) or lose $2.3m? It depends on which set of numbers you choose to believe.

Pro forma accounts are where management makes adjustments that are typically meant to help investors better understand the company’s true financial position. However, in GYG’s case, they did things like shifting lease expenses below the EBITDA line. I think it is hard to argue that leases, their second-highest cost after employee expenses, shouldn’t be included as part of their core valuation metric.

The offer values GYG at around $2.2bn. That’s a big number. Depending on which set of accounts you choose to believe, the company is either valued at 32.5x EV/EBITDA (GYG’s view using the pro forma numbers) or somewhere north of 50x EV/EBITDA (according to some estimates). Regardless of what numbers you choose, even in the best case on 32.5x EV/EBITDA, in my opinion, it is not cheap.

GYG is not a tech company. The valuation is high, and this is a business that is capital-intensive, requires lots of staff and is low margin. It’s not an easy business to scale, and scaling requires constant cash. Competition for the takeaway dollar in Australia is fierce. With the likes of McDonald’s, KFC, Subway, Zambrero, Nando’s, Fishbowl, Grill’d, and Domino’s all vying for a slice of the consumer’s takeaway spend.

You can see why management likes their pro forma view of the accounts as it gives GYG an EV/EBITDA valuation similar to their US counterpart Chipotle. However, I would argue that Chipotle should trade at a significant premium to GYG because it is larger, more established, and actually profitable.

Don’t get me wrong – I love their burritos as much as the next person. But I also appreciate a clean set of accounts without any secret sauce to embellish the story management and current shareholders want to tell. Is GYG worth $2.2bn? I’m old-fashioned, and in my view, valuation and profitability matter. I believe GYG is expensive even on management’s best pro forma numbers, especially given it operates in a highly competitive, low-margin industry and remains unprofitable after 18 years. Am I wrong? Perhaps. Ultimately the market will decide what the business is worth tomorrow and in the coming weeks and months ahead.

Kind regards,

Shelley Marsh
Outsourced Chief Investment Officer (OCIO) & Founder
Wealth Differently

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