Is GYG grossly overvalued?, page-106

Stolen from Reddit:

It’s not just the burritos causing heartburn. Spare a thought for fund managers leafing through the Guzman y Gomez prospectus – and reporting back that the enterprise value to earnings figures couldn’t be more difficult to understand if they were in Spanish.
The Mexican-themed restaurant chain has quickly become the talk of the market after its biggest shareholders – TDM Growth Partners, Aware Super and Barrenjoey Capital Partners – pressed the green light on floating the company.
Morgan Stanley and Barrenjoey are advising on the deal, and documents circulated to shareholders hold out Guzman y Gomez comes at an enterprise valuation of 32.5-times pro forma EBITDA for the next financial year. But those who are looking closely think this is misleading – and the real number is significantly higher.
"On traditional valuation metrics, some fund managers say Guzman y Gomez looks less than appetising. Supplied
There is even the view – among listed equities investors Street Talk spoke to this week – that the Australian Securities and Investments Commission may have a pretty dim view of this kind of spicy number crunching.
For a start, the earnings metric in the prospectus ignores Guzman y Gomez’s lease liabilities – its second-largest cost after employee expenses. They were worth about $210 million at December 31 and would be expected to tick higher as more stores open. Omitting the leases allows the fast-food chain to beat the drum on its impressive growth trajectory, and book a multiple on a much fatter 2025 earnings figure.
“It is not only fundamentally wrong, it is inconsistent with normal practice for constructing earnings multiples or how a prospectus for a business like Dominos or Collins Food is valued or analysed,” said one prospective investor said on Monday.
“Anyone who understands valuation multiples knows that when EBITDA is presented excluding the costs of the leased stores – which their selection of EBITDA does because rent manifests primarily as Amortisation of the Right of Use Asset, and Interest on Lease Liabilities – then the enterprise value needs to include the debt associated with the leases,” another investor told this column.
So, that’s $210 million as at December 31, “and would, of course, be higher at June 30,” the investor said. “And much higher in 2025, which is, of course, the earnings they want the valuation based off.”