Buying Guzman’s shares is nacho best idea

A popular chain of Mexican takeaway restaurants in Australia is going public. But value investors should stay away. Here’s why.

It's been a quiet year for Australian companies going public. So far, just 26 firms have had an initial public offering (IPO) of shares. Last year was quiet, too. There were only 32 IPOs, the smallest number in over two decades. However, Guzman Y Gomez, an Aussie chain of Mexican takeaway joints, has decided to spice things up. Last week, the company announced it would sell shares to the public at A$22.00 ($14.60) a pop, giving the nacho maker a A$2.2bn ($1.5bn) market capitalisation. It's the biggest IPO of the year for a market with nothing but tumbleweeds. So, should you spice up your life and buy Guzman's shares when it goes public? In a single word, no. And there are three reasons why.

First, the offer price is expensive on a discounted cash flow basis. A$22 a share is too much money for such a small burrito. Simply put, the investment bankers Guzman has employed have been far too optimistic with their numbers. To justify the valuation, Guzman must increase the number of restauran…