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On Wednesday, RBC Capital initiated coverage on Guzman y Gomez Ltd (GYG:AU), an Australian quick service restaurant (QSR) chain, assigning an underperform rating and setting a price target of AUD $32.00 to the stock. The firm cited valuation concerns as the primary challenge for the company, despite its impressive growth and quality operations.
The coverage comes after Guzman y Gomez's stock price soared by approximately 80% following its initial public offering (IPO). RBC Capital's analysis draws comparisons to United States high-growth QSR chains but notes that Guzman y Gomez's foothold in the U.S. market is still in its early stages. The Australian market, being significantly smaller than the U.S., warrants caution according to the firm.
The price target of AUD $32.00 is based on the company's expected enterprise value to CY25E EBITDA (earnings before interest, taxes, depreciation, and amortization) of around 48 times. This valuation is seen as steep when compared to its U.S. counterparts, who operate in a market approximately 25 times the size of Australia's.
RBC Capital acknowledges Guzman y Gomez's potential for long-term same-store sales growth (SSSg), driven by multiple factors. However, the firm suggests that the current share price performance post-IPO has been strong enough to prompt a conservative stance on the stock for the time being.
In summary, while recognizing the company's growth trajectory and operational quality, RBC Capital remains on the sidelines with its underperform rating for Guzman y Gomez, awaiting more evidence of the company's expansion and performance in larger markets.
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