While fast-food chain Guzman Y Gomez’s (GYG) [ASX:GYG] float on the ASX grabbed the headlines, it is not likely to trigger a long-awaited turnaround of the IPO market as both investors and IPO candidates are waiting for more solid signals to go ahead, according to experts polled by this new service.

The quick-service Mexican food chain saw its shares soar to AUD 30 on its 20 June debut, from an IPO price of AUD 22, and now trades at AUD 29, giving it a market cap of some AUD 3bn. The IPO raised about AUD 335.1m, as announced earlier this month.

GYG’s listing would be positive for market sentiment, but it won’t mean the IPO floodgates are open, Marcus Ohm, partner at HLB Mann Judd’s Corporate and Audit Advisory division, told Mergermarket. It is important to bear in mind the wider environment and questions remain about economic factors like timing and amount of interest rate movements, Ohm said.

Although there is an IPO pipeline, investors are still waiting to see clearer indications on inflation and interest rates, which will give more certainty on the cost of capital, a Melbourne-based fund manager said.

Until the euphoria of a true bull market returns, backed by the right economic fundamentals, the timing of a healthier IPO market will remain difficult to predict, said Justin Smith, Chief Revenue Officer at ASX-listed virtual data room platform provider Ansarada.

Club structure, lock-up in future floats?

Guzman’s listing is also seen as an outlier in terms of the tight offer size – AUD 335.1m raised via IPO versus the current market cap of AUD 3bn – and the structure, which involves a club deal with a handful of investors being locked in before IPO and major investors retaining stakes in escrow.

The float was underwritten by institutional investors including Aware Super, which along with other funds tipped in AUD 134.5m in April as the company was preparing for the IPO. Major investors TDM Growth Partners, a private equity (PE) firm on board since 2018, and Barrenjoey Private Capital have retained significant stakes and committed to a voluntary escrow until the company’s FY25 results announcement, as announced.

Rajeev Gupta, partner at fund manager Alium Capital, believes that at a time when IPOs are rare, being placed in “strong and safe hands” as opposed to “flippers” was critical to ensuring Guzman’s strong after market performance. However, a club deal may be more challenging for other candidates, such as Virgin Australia, he said.

Interestingly, IPO candidate Virgin Australia was reported this week to be in talks with Qatar Airways, which is looking to acquire up to 20% of the airline company. A source familiar with the situation expects that this should not affect the planned IPO of Virgin, which in February announced a CEO succession to “see the company through a future IPO and beyond”.

The source familiar also said that Guzman’s float structure would have few inspirations for Virgin, as it is hard to draw similarities between a fastfood company with many competitors and a national airline business in a duopoly.

That said, PE owners will still be expected to retain a big chunk of stake if they look to exit through IPO, and then stay escrowed for a certain period, as there is not enough demand right now for the public market to take the entire business, the Melbourne-based fund manager said. For example, Crescent Capital Partners still owns a significant stake (c.30%) in Australian Clinical Labs, which listed in 2021, he pointed out.

Valuation direction for future IPOs

Ansarada’s Smith also noted that recent IPO examples, such as Redox [ASX:RDX] in 2023, were not really chasing listings for their valuations, but rather for strategic reasons. However, to excite the IPO market, high valuations are required, he said.

Guzman’s share price has held up so far, while its longer-term performance will be monitored by investors and other IPO candidates alike.

For Guzman’s valuation to be sustainable, two things need to happen – either the fast-food sector needs to be rerated to reflect Guzman-like valuations; or Guzman needs to provide more explosive growth and reward investors in a manner that far outpaces the likes of Domino’s Pizza [ASX:DMP] and Collins Foods [ASX:CKF], added Smith.

In 2023, Guzman posted revenue growth of 50.79% and EBITDA growth of 35.02% year-on-year, according to its prospectus. Looking ahead to 2025, the business is trading at a valuation of 53.47x expected EBITDA. This valuation is at the top of the peer group trading range, which includes similar ASX-listed competitors such as Domino’s Pizza, Collins Foods, and Restaurant Brands, according to data provided by Fidessa and compiled by Factset. On an EV/sales basis, it is currently trading at a multiple of 7.48x FY25 forecasted sales while the peers are valued between 0.38x to 7.92x.

Apparently GYG’s IPO was well managed, said Alium Capital’s Gupta. “At a time when IPOs are rare it is critical to ensure strong after-market performance,” he said, adding that the company’s first quarterly earnings release will set the tone for valuation and future share price.

It has been positive for investors seeing a larger listing taking place irrespective of any question marks about valuations, but it’s also appropriate to have a healthy degree of scepticism about the longer-term potential of the business, HLB Mann Judd’s Ohm said. While more pre-listing activity is taking place, any listing decision needs to be very specific to individual company fundamentals, he said.

Secondary offerings are now opening up particularly in the biotech and mining spaces, which usually could be seen as a precursor to a more active IPO market later, the Melbourne-based fund manager noted.

There is also pent-up demand from sellers to exit through IPO, especially with a lot of assets “stranded” in PE ownership. “Now they (PEs) just buy from each other, they can’t do that forever,” he said.