AVTECH: Good results but fully valued
Research Update
2024-04-26
14:02
Analyst Q&A
Closed
Rasmus Jacobsson answered 3 questions.
AVTECH’s net sales and EBITDA were below Redeye Research estimates (RRe), but the company managed to display strong sales growth and margins. Redeye predicts sequential growth as newly signed customer contracts are fully included in the numbers. However, we expect this will not result in a higher EBIT margin as we advance (33%) due to increased growth investments. Our 2024 sales estimates reflect an implied 18% conversion rate of the pipeline (or 10% adjusted for already signed contracts). Therefore, we consider the stock fully valued in the near term but continue to acknowledge that additional contracts could result in positive estimate revisions.
RJ
ME
Rasmus Jacobsson
Mattias Ehrenborg
Contents
Latent pricing power or low value add?
Estimates
Quarterly forecast
Investment thesis
Quality Rating
Financials
Rating definitions
The team
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Good Q1, but investments likely weigh on profitability for 2024
AVTECH’s results aligned with its preannouncement and were slightly below RRe (before the preannouncement). USDSEK had a negligible negative effect, decreasing by 2% Q/Q. We estimate that 50% of the SAS fleet is operational with ClearPath and expect sequential growth from the agreement. We expect 2024 to be an investment year for AVTECH and increase our OPEX slightly. However, we expect EBIT margins to stay at 33%, as seen in 2023. AVTECH has significant operating leverage, and a pronounced increase in sales would likely result in a higher-than-expected EBIT margin.
1.400 aircraft pipeline – modest expectations
AVTECH’s pipeline of 1,400 aircraft is worth SEK27-45m on RRe, depending on if customers use ClearPath (cSEK33k/aircraft/year) or Aventus (cSEK20k/aircraft/year), totaling a potential SEK72m. We estimate incremental sales of SEK6.4m between 2023/2024e, suggesting a pipeline conversion of 18% at the mid-point. AVTECH has already signed SAS (c90 aircraft), worth SEK2.9m p.a., and Air Caraïbes and French bee (c18 aircraft), worth SEK0.3m. p.a. on RRe mid-point. Thus, our estimates imply one contract during 2024 at a 20% larger size than SAS (SEK3.5m), or 10% conversion, adjusted for already signed agreements. We believe this is reasonable based on AVTECH’s recent history.
Stock is fully valued, but asymmetry remains
AVTECH is currently trading at an EV/EBIT of 28.0x and an EV/S of 9.0x based on our 2024 estimates, both metrics above its historical valuation range. Considering the recent rise in share price, we believe the stock is approaching full valuation. However, the potential for modest pipeline conversion and the stability provided by existing contracts suggest an asymmetrical setup. These contracts are likely to underpin earnings for the next two to three years, offering a baseline level of financial performance. We reiterate our fair value range of SEK3.5-11.8 with a Base Case of SEK5.9.
Key financials
| SEKm | 2022 | 2023 | 2024e | 2025e | 2026e |
| Revenues | 25.0 | 32.2 | 37.4 | 45.4 | 49.6 |
| Revenue Growth | 53.4% | 28.8% | 16.3% | 21.3% | 9.2% |
| EBITDA | 8.9 | 13.4 | 14.4 | 21.3 | 24.2 |
| EBIT | 5.2 | 9.1 | 10.9 | 17.7 | 20.6 |
| EBIT Margin | 24.5% | 33.1% | 32.1% | 42.3% | 44.9% |
| Net Income | 5.2 | 9.1 | 11.3 | 14.4 | 16.9 |
| EV/Sales | 7.1 | 7.3 | 9.1 | 7.1 | 6.3 |
| EV/EBIT | 29.0 | 22.0 | 28.3 | 16.9 | 13.9 |
Latent pricing power or low value add?
Fuel costs represent 44% of an airline’s gross expenses, making fuel efficiency a critical focus. Optimization products like ClearPath recommend strategies for fuel savings, with their effectiveness largely dependent on pilot acceptance. ClearPath, according to CEO David Rytter, has a potential fuel savings rate of 2.5% but an actual acceptance rate of 40-60%, indicating realized savings of about 1-1.5%. With AVTECH charging SEK0.03m per aircraft and airlines potentially saving SEK0.9m per aircraft annually on RRe, a substantial 97% customer surplus suggests room for AVTECH to increase prices while still delivering value.
Our conversation with the industry casts doubts on AVTECH’s claims, questioning whether the product is underpriced, the value is overstated, or the savings are difficult for airlines to verify. Concerns also arise about AVTECH’s profitability given ClearPath’s low pricing, suggesting the possibility that the product primarily repackages Met Office data given the cost of development and AVTECH’s lean operations.
The newly launched Dashboard should help clarify savings verification, and a potential price increase could ease investor concerns regarding AVTECH’s value proposition.
Estimates
We have made minor estimate changes resulting in EBITDA and EBIT being reduced by 2-4% 2024-2028e. However, we have also included interest income of 2% going forward, resulting in EPS estimates increasing 0-3% over the same period.
Quarterly forecast
Investment thesis
Case
Mispriced growth potential with short-term catalyst
Evidence
Estimated 1.400 aircraft schedueld to trial
Challenge
Airlines are slower than airplanes
Challenge
Heavy USD exposure
Valuation
Stock is fully valued, but asymmetry remains
Quality Rating
People: 3
The current leadership has substantial experience in developing systems as well as core competencies in the aviation industry. Over the years, the Company has taken several steps during harsh times that we consider the right action. Although, historically, management has not delivered on its estimates, which is the consequence of a stagnant industry. A lack of focus has previously been a problem for the Company, this has been improved upon as of late, with the focus being Aventus and ClearPath.
Ownership of the Company is aligned with a few larger shareholders who have been operationally active in the Company for several years. These people will add value in the future given their experience and persistence. However, we think an institution and some board re-alignments would be healthy for the growth phase the Company is now transitioning to.
Business: 4
AVTECH has an attractive business model and operates in an attractive niche - highly profitable while to small for large entrants. The difficulty relating to successful procurement processes in the sector lies within the fact that many companies prioritize other efficiency measures first, and the bureaucratic organization for legacy carriers does not benefit AVTECH.
Financials: 4
AVTECH has gone through a tough period with the pandemic. However, the Company has successfully controlled its costs and are on a solid groud post-pandemic. With the latest Southwest contract (announced 2022-01-17) the Company has shown solid and growing profitability. The main reason the Company did not earn a higher rating on finanicals is the lack of historic profitability. We expect to increase the score once AVTECH has kept the current financial profile over a ten year period.
Financials
| Income statement | ||||||
| SEKm | 2022 | 2023 | 2024e | 2025e | 2026e | 2027e |
| Revenues | 25.0 | 32.2 | 37.4 | 45.4 | 49.6 | 54.2 |
| Cost of Revenue | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Operating Expenses | 19.8 | 23.1 | 26.6 | 27.7 | 29.0 | 30.2 |
| EBITDA | 8.9 | 13.4 | 14.4 | 21.3 | 24.2 | 27.6 |
| Depreciation | 0.00 | 0.00 | 0.01 | 0.01 | 0.01 | 0.01 |
| Amortizations | 3.7 | 3.6 | 3.6 | 3.6 | 3.6 | 3.6 |
| EBIT | 5.2 | 9.1 | 10.9 | 17.7 | 20.6 | 24.0 |
| Shares in Associates | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Interest Expenses | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Net Financial Items | 0.00 | 0.00 | 0.40 | 0.61 | 0.78 | 1.0 |
| EBT | 5.2 | 9.1 | 11.3 | 18.3 | 21.4 | 25.0 |
| Income Tax Expenses | 0.00 | 0.00 | 0.00 | 3.8 | 4.5 | 5.2 |
| Net Income | 5.2 | 9.1 | 11.3 | 14.4 | 16.9 | 19.7 |
| Balance sheet | ||||||
| Assets | ||||||
| Non-current assets | ||||||
| SEKm | 2022 | 2023 | 2024e | 2025e | 2026e | 2027e |
| Property, Plant and Equipment (Net) | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Goodwill | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Intangible Assets | 13.8 | 13.7 | 13.7 | 13.7 | 13.8 | 13.8 |
| Right-of-Use Assets | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Other Non-Current Assets | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Total Non-Current Assets | 13.8 | 13.7 | 13.7 | 13.7 | 13.8 | 13.8 |
| Current assets | ||||||
| SEKm | 2022 | 2023 | 2024e | 2025e | 2026e | 2027e |
| Inventories | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Accounts Receivable | 0.00 | 0.00 | 8.3 | 10.3 | 11.3 | 12.5 |
| Other Current Assets | 5.3 | 6.8 | 0.68 | 0.84 | 0.92 | 1.0 |
| Cash Equivalents | 14.6 | 22.8 | 30.7 | 39.2 | 50.3 | 64.2 |
| Total Current Assets | 19.9 | 29.6 | 39.8 | 50.4 | 62.6 | 77.7 |
| Total Assets | 33.7 | 43.3 | 53.5 | 64.1 | 76.3 | 91.5 |
| Equity and Liabilities | ||||||
| Equity | ||||||
| SEKm | 2022 | 2023 | 2024e | 2025e | 2026e | 2027e |
| Non Controlling Interest | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Shareholder's Equity | 31.2 | 40.2 | 45.8 | 54.6 | 65.9 | 79.9 |
| Non-current liabilities | ||||||
| SEKm | 2022 | 2023 | 2024e | 2025e | 2026e | 2027e |
| Long Term Debt | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Long Term Lease Liabilities | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Other Long Term Liabilities | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Total Non-Current Liabilities | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Current liabilities | ||||||
| SEKm | 2022 | 2023 | 2024e | 2025e | 2026e | 2027e |
| Short Term Debt | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Short Term Lease Liabilities | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Accounts Payable | 0.00 | 0.00 | 3.7 | 4.6 | 5.1 | 5.6 |
| Other Current Liabilities | 2.5 | 3.2 | 4.1 | 5.0 | 5.5 | 6.1 |
| Total Current Liabilities | 2.5 | 3.2 | 7.8 | 9.6 | 10.6 | 11.6 |
| Total Liabilities and Equity | 33.7 | 43.4 | 54.5 | 65.1 | 77.4 | 92.5 |
| Cash flow | ||||||
| SEKm | 2022 | 2023 | 2024e | 2025e | 2026e | 2027e |
| Operating Cash Flow | 4.4 | 8.1 | 17.2 | 17.7 | 20.4 | 23.2 |
| Investing Cash Flow | 0.00 | 0.00 | -3.6 | -3.6 | -3.6 | -3.6 |
| Financing Cash Flow | 0.00 | 0.00 | -5.6 | -5.6 | -5.6 | -5.6 |
Rating definitions
The team
Disclosures and disclaimers
Contents
Latent pricing power or low value add?
Estimates
Quarterly forecast
Investment thesis
Quality Rating
Financials
Rating definitions
The team
Download article