Avolta Earnings: Solid Sales Trends and Improving Performance; Shares Undervalued

We are maintaining our fair value estimate for narrow-moat Avolta as the company continued delivering solid results in the first half of the year. Shares remain attractive, trading below 2021 levels despite a marked improvement in leverage and balance-sheet quality (net debt/EBITDA was 2.35 at the end of June) as well as profitability. We believe investors are concerned about maintaining travel demand as the postpandemic surge subsides and cost-of-living crisis bites, as well as the company’s ability to extract synergies from its merger with Autogrill and improve profitability. We still see travel demand trends as resilient—6% organic growth in the second quarter and 8.6% in the first quarter while core EBITDA margin was up 40 basis points, helped by strong gross margin development (suggesting healthy demand and pricing) even as inflation caused personnel costs to increase. We already incorporate a moderation in demand trends in the future. However, we expect the underlying propensity to travel to remain strong. Our forecasts call for 4% long-term revenue growth and some margin expansion.