Investing.com -- Shares of Avolta AG (SIX:AVOL) dropped 8% on Tuesday after Barclays (LON:BARC) analysts downgraded the stock to “underweight” from “overweight,” citing a combination of operational challenges and a deteriorating risk/reward profile.
The downgrade comes as the market outlook for Avolta, a consensus favorite during the travel recovery, begins to dim amid signs of slowing growth and competitive pressures.
Barclays analysts expressed concerns over Avolta’s ability to sustain momentum as the post-pandemic travel recovery reaches its peak.
With travel volumes and margins expected to return to 2019 levels by 2024, the analysts believe the company now faces headwinds.
“Beyond this travel recovery, which we think is coming to an end as the group reaches 2019 volumes and margins in 2024, we struggle to find catalysts for the shares,” the analysts said.
Avolta’s competitive position in the North American market has come under scrutiny, as rivals like SSP and WH Smith gain ground.
While Avolta’s North American division generates much larger sales, Barclays pointed to slower net contract wins and concerns over the hybrid model’s impact on organic growth.
The company’s guidance of 0-1% net business wins for the medium term pales in comparison to SSP’s 4% target for FY24.
Analysts drew parallels to Sodexo’s previous struggles with a “one-stop shop” approach, which ultimately hindered organic growth and led to a market de-rating.
Another factor weighing on Avolta’s outlook is the muted recovery of Chinese travel demand. Although Chinese tourists are gradually returning to Europe, their spending levels remain subdued.
Barclays attributed this to a lack of fiscal stimulus in China, the weakening yuan, and cautious consumer sentiment exacerbated by ongoing political tensions. These factors are expected to dampen like-for-like growth in 2025, further pressuring Avolta’s earnings expectations.
Avolta’s margin growth prospects also failed to impress compared to peers like SSP. Barclays projects a modest 6% year-over-year EBIT growth for Avolta in 2025, with flat margins at 6.8%.
In contrast, SSP is expected to deliver 20% EBIT growth with a 70 basis-point margin expansion. This disparity underscores Avolta’s weaker operating leverage and ongoing cost pressures, including rising concession fees and personnel expenses.
Barclays also flagged Avolta’s valuation as overextended relative to its historical peer differential.
The stock’s current 12-month forward price-to-earnings multiple of 12x represents only a 10% discount to SSP, compared to the historical average of 30%.
Given Avolta’s slowing growth and operational challenges, the analysts anticipate a further contraction in its valuation multiple to 11x, setting a price target of CHF 29—about 15% below the current share price.
Additionally, Barclays lowered its revenue and earnings forecasts for 2025 and 2026, citing softer organic growth and increased costs. The bank now expects Avolta’s 2025 EBITDA and earnings per share to be 3% and 11% below consensus estimates, respectively.
While the overall tone of the report was cautious, Barclays did outline potential upside risks to its bearish thesis.
These include a stronger-than-expected recovery in U.S. travel demand, the possibility of fiscal stimulus in China, and the completion of Avolta’s portfolio optimization process, which could lead to better contract wins.
However, the analysts maintained that these factors alone are unlikely to offset the broader challenges the company faces.