Net sales were SEK5.7m, +58% Y/Y. This was a -3% deviation from our estimate of SEK5.9m. FX likely had a small positive impact on the results as USD/SEK increased 2% on average Q/Q. Last quarter the FX tailwind was 7% on average. Total EBITDA was SEK2.7m, corresponding to an EBITDA margin of 47% (22% last year), proving AVTECH’s operating leverage. This was 13% above our estimates of SEK2.4m.

During the quarter, AVTECH’s most prominent customer, Southwest, had a meltdown related to its scheduling software. This resulted in Southwest canceling 16 000 flights. However, it did not affect AVTECH as its contract with Southwest is a fixed fee.

Globally, there are about 25,000 aircraft AVTECH could service. AVTECH is already servicing c1300 aircraft (implied market share c5%). The number of aircraft is expected to reach c32,000 in 2027 and grow to c38,000 by 2032.

Based on figures communicated by AVTECH related to its contracts with customers, we estimate ClearPath earns cSEK0.022m per aircraft per year. Aventus, we estimate, makes cSEK0.017m per aircraft per year. The figures below are not comparable due to different contract terms such as fixed versus variable, et cetra.

Using these figures, we estimate AVTECH’s total addressable market (TAM) for Aventus and ClearPath to be cSEK1bn in 2022, growing to cSEK1.3bn by 2027 and cSEK1.5bn by 2032. Thus, we estimate AVTECH has penetrated only about 2% of its addressable market.

Moreover, most of AVTECH’s customers only use part of AVTECH’s offerings. Would all of them upgrade their offering, AVTECH could double its revenue to cSEK40m. Considering the fixed cost base, we estimate this would result in AVTECH’s EBITDA increasing by five times to cSEK25.

Key metrics measuring the airline industry’s profitability are Revenue per Available Seat Mile (RASM) and Cost per Available Seat Mile (CASM), including and excluding fuel. Aggregating the airlines and comparing their profitability, including and excluding fuel costs, its clear that fuel-saving technologies are essential for airline profitability. For example, on average, 23% of the airlines’ CASM cost is fuel.

We note that the available seat mile is expected to be below the 2019 level until 2025. Hence, the industry will likely show under capacity for the next two years. This could push up airline ticket prices and reduce the airlines’ need for fuel savings technologies to be profitable. However, the environmental aspect remains, which could offset the economic factor.

According to the Company, five airlines, totaling approximately 300 aircraft, are currently testing AVTECH’s services. In addition, six more airlines have signed up for tests this year, amounting to c1290 aircraft. We estimate the 300 planes to have a net sales potential between SEK1.5m–SEK6.5m. We estimate the average contract size to be between SEK0.3m–SEK1.3m. The 1290 aircraft could be worth SEK6.5–SEK28.3m, and we expect the average contract size to be SEK1m–SEK5m. We view the number of aircraft scheduled to test as positive and note that AVTECH added one airline with 140 aircraft since the last communicated figure in January 2023.

The airline industry is characterized by a handful of huge US airlines and a long tail of airlines with 100–300 airplanes. The average fleet size of the airlines scheduled to trial AVTECH’s offering is 145 planes. This would put them among the top 50 airlines by fleet size.

We think most of this pipeline is scheduled to test in H123, and we expect the airlines to decide to move forward within two quarters. Hence, it is likely that a large part of the incremental revenue from the pipeline will spill over into 2024.

We also note that Raytheon Technologies (NYSE: RTX) claims to have several technologies that could work together to optimize and reliably execute optimized flight trajectories. Combining these solutions, Raytheon believes it could reduce air transport emissions by 8% on average per flight by 2050, compared to 2015. While AVTECH highlights its fuel-savings rather than reduced emission, we still find it impressive that, already today, airlines could reduce in-flight fuel by c2% by adopting AVTECH’s offering.

Recently, Redeye has made a substantial update to its rating model. As a result of these changes, companies now need to meet a higher threshold to receive a favorable rating from Redeye. However, since the last rating, AVTECH’s improved financials have received a higher rating than previously. Therefore, we have lowered AVTECH’s discount rate to 10.5% from 13%.

We are keeping our estimates for 2023 and 2024 intact, implying that cSEK5.6m worth of the potential would convert to revenue in 2023 and about SEK4m in 2024. Considering that fuel-saving technology is essential for profitability and AVTECH’s guaranteed fuel savings, we expect about 50% of the estimated mid-point revenue potential to convert between 2023 and 2024.

Based on a new forecast period (2023–2032, previously 2022–2031) and a lower WACC, we have increased our fair value range to SEK1.7–10.9 with a base value of SEK4.2. Previously, the fair value range was SEK1.2–7.0, with a Base case of SEK3.6. Currently, the shares trade in line with our Base case. If the velocity of new contracts increases, we see the potential for the shares to trade in line with our Bull case. Likewise, a disappointment in new contracts would likely result in the share price trading in line with our Bear case.

Compared to peers, chosen based on product concentration and profitability potential, AVTECH trades at a slight discount on 2022e EV/EBITDA while on a small premium to 2023e EV/EBITDA. Considering AVTECH’s proven profitability and potential for rapid revenue expansion, we find the premium valuation reasonable.

Our quarterly estimates are as follows: