(Adds fund manager comment in paragraphs 15-16)
Shares of Australian Mexican restaurant chain Guzman Y Gomez (GYG) jumped more than a third on their first day of trading on Thursday, an upbeat signal about investor sentiment following the country's biggest initial public offering in a year.
The Sydney startup's stock first traded at A$29.90 at midday local time (0200 GMT), a 36% premium to their A$22 issue price and against a flat overall market (xjo) .
Some 3.1 million shares, out of just over 100 million issued, had changed hands by early afternoon.
The company put up A$335.1 million ($224 million) of new stock, about one-sixth of the company, for trading. The share price increase raises the company's market capitalisation to about A$3 billion, from A$2.2 billion before its trading debut.
In its listing prospectus, the company forecast a second consecutive net loss for 2024 but a profit in 2025 and outlined a plan to match the current Australian store count of McDonald's MCD.N in 20 years.
Guzman Y Gomez's (GYG) initial issue was closed to the public and largely involved selling shares to existing financiers and franchise owners. The share price surge on Thursday sends a hopeful signal about broader sentiment after high interest rates and inflation squashed demand through 2022 and 2023.
Australian listings collapsed after a record 2021 as pandemic stimulus payments ended and the central bank raised interest rates to slow inflation. In 2024 so far, Australia has raised just A$98 million in IPOs, the second-lowest June half in more than a decade, according to LSEG data.
"It proves the adage that you can list a good company even in a bad market," said Campbell Welch, an adviser at Novus Capital who ran a small IPO for health services provider Freedom Care (FCG) in November, one of 32 new listings in the country in 2023, compared with nearly 200 in 2021.
"It's pretty fully valued and a lot of things have to go right now to justify the valuation."
A prospectus filed in May generated rolling headlines about GYG's target of opening at least 30 stores per year from 183 in Australia currently - a rate it has achieved just once, in 2023 - and about its omission of store lease liabilities and share-based payments from earnings projections.
The company said its accounting treatment of expenses was typical of franchise businesses.
"Once we're listed, the market will price us every day and our focus will be on the things we can control: selling burritos and delivering on our strategy," GYG founder and co-CEO Steven Marks said in a statement before the start of trading.
The company was not immediately available for comment. A Morningstar client note previously valued the stock at A$15 a share, saying the company with 3.5% of the country's fast food market had not established a competitive advantage which would justify its rapid expansion.
Sebastian Evans, chief investment officer at NAOS Asset Management, said GYG's small share register and ambitious growth narrative may support the stock given its familiarity with Australians.
"We will follow the business and have done so for some time, but we believe the significant ramp-up in store rollout and the proposed geographic split of these new stores adds to the amount of execution risk," Evans said. ($1 = 1.4990 Australian dollars)
