Guzman y Gomez shares slump as Morningstar flags 'high uncertainty'
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The news: Shares in Guzman y Gomez fell a day after the Mexican food franchise rocketed 36% on its first day of trading on the ASX.
The numbers: GYG shares lowered 5% to $28.50 by 11:45am AEST, having closed Thursday's session at $30 compared to its offer price of $22.
Morningstar, which initiated coverage of GYG with a fair value estimate of $15 per share, assigned the stock a 'high' uncertainty rating, noting that the company's Australian store rollout was the most significant contributor to its sales outlook, but its greatest source of strategic risk.
The context: Morningstar analyst Johannes Faul said "Guzman looks expensive". While acknowledging that GYG's Australian restaurant economics were currently "very attractive", he expects a "brisk store rollout" over the next decade to be more limited over the longer-term.
Faul noted that to arrive at market pricing, GYG would need to reach its long-term ambitions to reach 1,000 stores in Australia and achieve midcycle store operating margins at its target range of 20%, up from guidance of 17%.
He also flagged that despite a strong brand presence in Australia, GYG had yet to carve out an economic moat in a highly competitive restaurant industry.
What they said: "If we see material signs that Guzman can maintain or even grow brand strength and store profitability as the rollout progresses, we will revisit our no-moat thesis," Faul said.
The source: Morningstar research
