Goldman Sachs tells investors to ditch Guzman Y Gomez for KFC operator Collins Foods

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Cheyanne Enciso
The Nightly
Guzman y Gomez aspires to have 1000 outlets in Australia in the next 20 years.
Guzman y Gomez aspires to have 1000 outlets in Australia in the next 20 years. Credit: Supplied

A prominent analyst has favoured major Australian KFC and Taco Bell operator Collins Foods over newly-listed Guzman Y Gomez, telling investors to sell their shares in the Mexican-themed restaurant chain.

Goldman Sachs analyst Elijah Mayr has initiated a sell rating on GYG, citing the fast food chain’s “overly ambitious long-term store expansion profile that has no recent successful precedent in the Australian market” among his concerns.

The company — set up in 2006 in Sydney’s inner west by two New Yorker friends Steven Marks and Robert Hazan — is aspiring to have 1000 outlets in Australia in the next 20 years.

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Today, GYG operates more than 200 outlets across Australia, Singapore, Japan, and the US, and in a variety of formats: at universities, in food courts and drive-throughs.

“(The) stretched valuation has, inappropriately in our view, been pegged to the highest growth US-peers without taking into consideration the market differences and risks associated with an accelerated store expansion,” Mr Mayr told investors in a note on Thursday.

His price target for GYG shares sits at $33.20, with the stock down 4.8 per cent to $37.47 at 11.30am.

Meanwhile, Mr Mayr said the outlook for Collins Foods was “incrementally more positive” and initiated a buy rating.

“Our buy thesis centred on a moderation of cost growth with wages, poultry, electricity and rent growth moderating, while oils and grains have returned to pre-COVID levels,” he said.

Mr Mayr is also encouraged by improved discretionary spending in Collins Foods’ key states of Queensland and WA.

It operates a total of 279 KFC and 27 Taco Bell stores across Australia.

Other major analysts have also cast their doubts on GYG’s prospects.

“Guzman looks expensive. We think the market takes a different view on Guzman’s long-run prospects — namely, how long the company can keep building stores that generate excess returns,” Morningstar analyst Johannes Faul told clients after the chain’s ASX debut in June.

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