The Mexican fast food chain has been on our radar since they IPO’d in June 2024 at $22. It was a hot listing of a very good company with a strong growth outlook. Shares hit a $46 peak in February; however, they’ve been on the skids since, returning to the level they closed at on the day of their initial listing. The fundamental driver supporting GYG’s elevated valuation is growth, with the company planning to roll out 40 new stores each year from FY26, with a long-term target of 1,000 outlets in Australia (they have 215 currently in Australia & 24 overseas). Early progress has been on track, making it hard to fault their execution so far; though, from what we understand, the challenges may be getting more intense sourcing and developing suitable locations at the run rate they are targeting.
Australia is a complex environment for development, with plenty of red tape and bureaucratic timeframes that consistently fail to align with commercial objectives. The Board approved pipeline does remain on track according to the company, however, we share the concerns of Goldman Sachs, who rate the stock a sell, insofar as the risks come post board signoff in the form of elongated DA approval timelines, slowing productivity in construction and lingering supply challenges, particularly for skilled workers in construction. This pushes up the cost of construction, reducing returns.
To put the store roll-out targets into perspective, the 40 new store pa target would be 2x the 10-year average for quick serve restaurants (QSR) in Australia (of any format), and with GYG targeting a greater proportion of larger, more complex drive-through locations, the task is a big one. Delays are not a new thing in the QSR sector in Australia, and we’re not implying that if delays come to pass, it’s necessarily on GYG’s back, more likely due to reliance on many hard-to-control stakeholders.
All being said, GYG is a high-quality growth business, with a great product, at a good price point that customers love. We rate the business highly and would love to own the stock at some point. There is also some added complication around escrowed shares. 15.4m shares were released on 7th March, and in August (post results), there are more shares due for release (up to about 40% of shares on issue), as the voluntary escrow from TDM Growth Partners and other major holders lapses.
- We will await their FY25 result due on the 26th August, and further insight into the release of shares from escrow.
NB Escrow means that some shareholders (often founders, early investors, or insiders) are restricted from selling their shares for a set period after the company lists on the stock exchange (IPO). An escrow agreement can be either voluntary or mandatory.
