AVTECH: Poised for growth 2024
Research Update
2023-10-30
07:00
Redeye provides an update subsequent AVTECH's Q3 2023 report. AVTECH came in slightly below on topline and EBITDA. However, we are still pleased with the results. The current run-rate implies our incremental revenue for 2024e is only SEK3.6m, or 9.5% convertion of the pipeline. Thus, we believe the risk/reward remains favorable at the current valuation.
RJ
ME
Rasmus Jacobsson
Mattias Ehrenborg
Contents
Comments on the third quarter
Estimates and valuation
Investment thesis
Quality Rating
Financials
Rating definitions
The team
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Limited downside
Net sales for the quarter came in at SEK7.5m (-5% deviation) with EBITDA of SEK4.2m (-14% deviation). We believe AVTECH’s financials have limited downside risk as we estimate cSEK20m (c67% of current run rate) in annual sales are secured until 2025-2026. Thus, we believe the current run rate of SEK30.0m in net sales is a floor rather than a ceiling for the next two to three years. However, the USDSEK exchange rate is a “known unknown,” as most of AVTECH’s revenue is earned in USD.
Strong pipeline of 1,500 aircraft (6% of the global market)
AVTECH has a pipeline of approximately 1,500 aircraft that are either trialed or scheduled to be trialed in 2023-2024. AVTECH stated that 300 aircraft have trialed the services, and an additional 350 (200 last quarter) aircraft are conducting or will conduct trials soon. Another 900 aircraft are scheduled for trial in 2024. We estimate the total pipeline’s sales potential to be SEK29m-46m. Trials take three months to complete, and we expect airlines to decide whether to proceed within two quarters after the trial has ended.
Risk/reward skewed to the upside
The current annual EBIT run rate of SEK12.4m implies an EV/EBIT of 13.3x, well below AVTECH’s historical median EV/EBIT NTM valuation of 17.8x. Our estimates suggest that only 9.5% of the pipeline will convert by the end of 2024, implying an EV/EBIT of 12.5x in 2024e. Thus, we see significant upside risk with a higher-than-expected pipeline conversion. Moreover, we believe the downside risk is limited, with substantial contracts not up for renewal until 2025-2026. As new agreements are announced, we believe the share will re-rate to its historical median. Our base case implies a significant EV/EBITDA premium 2023e-2025e. Given the limited risks and growth potential we see in AVTECH, we believe the multiples implied in our base case are fair, and on our 2024e, our implied EV/EBITDA is in line with AVTECH’s historical multiple. We keep our fair value range.
Key financials
| SEKm | 2021 | 2022 | 2023e | 2024e | 2025e |
| Revenues | 11.8 | 21.4 | 27.7 | 33.6 | 41.5 |
| Revenue Growth | -3.3% | 81.4% | 29.3% | 21.3% | 23.6% |
| EBITDA | 1.5 | 8.9 | 13.5 | 18.6 | 25.5 |
| EBIT | -1.6 | 5.2 | 9.2 | 13.1 | 19.8 |
| EBIT Margin | -13.6% | 24.5% | 33.4% | 39.1% | 47.6% |
| Net Income | -1.6 | 5.2 | 9.2 | 13.1 | 15.6 |
| EV/Revenue | 10.1 | 7.1 | 6.2 | 4.7 | 3.4 |
| EV/EBIT | -74.5 | 29.0 | 18.6 | 12.0 | 7.1 |
| P/E | -80.8 | 31.7 | 21.5 | 15.1 | 12.7 |
Comments on the third quarter
Net Sales came in at SEK 7.5m, 32%y/y, slightly below our estimated SEK 7.9m (deviation -5%). New contracts (Southwest, Volotea) primarily drove sales growth as USDSEK advanced only 3% q/q. EBITDA came in at SEK 4.2m, corresponding to an EBITDA margin of 56% (EBITDA SEK 3.1m, EBITDA-margin 54% last year). Thus, it continues to show great scalability, although slightly behind our estimate of SEK4.9m (deviation -14%). OPEX came in slightly ahead of our estimates (deviation of 15%). AVTECH’s pipeline of just under 1,500 aircraft remains. We expect AVTECH to convert some of these to customers during 2024. However, our estimates only imply a 9.5% conversion.
USDSEK had a slight positive effect, with the USD advancing about 3% against the SEK sequentially.
Volaris tested AVTECH’s ClearPath and Aventus services on over 66,500 flights from April to July 2023. Volaris found that:
- ClearPath’s calculation of fuel savings is accurate.
- More than half of their flights could be optimized by ClearPath, with a theoretical fuel-saving potential of 63kg per flight.
- During the measurement period, Volaris realized an average fuel saving of 16.7kg per flight, with a degree of utilization of 36%. This degree of utilization is expected to improve over time as pilots learn to use the system optimally.
- An independent analysis of actual flight altitudes verified the fuel savings, showing a unit saving of about 15 kg/flight.
- This saving results in an annual saving of approx. 3,150 tonnes of aviation fuel, which corresponds to approx. 9,950 tonnes of reduction in the company’s carbon dioxide emissions.
These results are additional data points of AVTECH’s value proposition and aid in converting potential customers.
Estimates and valuation
AVTECH has a pipeline of approximately 1,500 aircraft that are either trialed or scheduled to be trialed in 2023-2024. AVTECH stated that 300 aircraft have trialed the services, and an additional 350 (200 last quarter) aircraft are conducting or will conduct trials soon. An additional 900 aircraft are scheduled to trial in 2024. We estimate the total pipeline’s sales potential to be SEK29m-46m.
We have not made any changes to our sales estimates but believe our Q4 2023 net sales figure may be a bit high, absent any new agreements in the quarter. However, looking at 2024, we believe our estimates may prove conservative, considering we only price in a 9.5% pipeline conversion (one to two contracts). We have increased our OPEX estimate slightly.
We believe AVTECH’s financials have limited downside risk as we estimate cSEK20m (c67% of current run rate) in annual sales are secured until 2025-2026. Thus, we believe the current run rate of SEK30.0m in net sales is a floor rather than a ceiling for the next two to three years. However, the USD/SEK exchange rate is a “known unknown,” as most of AVTECH’s revenue is earned in USD.
Compared to its peers, AVTECH trades at a premium of 62-70% on EV/S 2023e-2025e, while it trades at a 20-65% premium on EV/EBITDA. Our base case implies an EV/S of 4.0x to 5.9x and an EV/EBITDA of 8.9x to 18.5x for 2023e-2025e. Given the limited risks and growth potential we see in AVTECH, we believe the multiples implied in our base case are fair, and on our 2024e, our implied EV/EBITDA is in line with AVTECH’s historical multiple. While AVTECH trades at a premium to peers, it trades at a c40% discount to its median NTM EV/EBIT. As new agreements are announced, we believe the share will re-rate to its historical median.
Due to interest rates increasing, we have increased our risk-free rate from 2.5% to 3.0%. However, we keep our fair value range.
Investment thesis
Case
Mispriced growth potential with short-term catalyst
Evidence
Over 1.500 aircraft schedueld to trial
Challenge
Airlines are slower than airplanes
Challenge
Heavy USD exposure
Valuation
Re-rate to factor in growth potential
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: 3
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 | 2021 | 2022 | 2023e | 2024e | 2025e |
| Revenues | 11.8 | 21.4 | 27.7 | 33.6 | 41.5 |
| Cost of Revenue | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Operating Expenses | 14.8 | 16.1 | 17.7 | 18.6 | 19.5 |
| EBITDA | 1.5 | 8.9 | 13.5 | 18.6 | 25.5 |
| Depreciation | -0.02 | 0.00 | 0.20 | 0.24 | 0.29 |
| Amortizations | 3.1 | 3.7 | 4.9 | 5.2 | 5.5 |
| EBIT | -1.6 | 5.2 | 9.2 | 13.1 | 19.8 |
| Shares in Associates | 0.10 | 0.00 | 0.00 | 0.00 | 0.00 |
| Interest Expenses | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Net Financial Items | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| EBT | -1.6 | 5.2 | 9.2 | 13.1 | 19.8 |
| Income Tax Expenses | 0.00 | 0.00 | 0.00 | 0.00 | 4.1 |
| Net Income | -1.6 | 5.2 | 9.2 | 13.1 | 15.6 |
| Balance sheet | |||||
| Assets | |||||
| Non-current assets | |||||
| SEKm | 2021 | 2022 | 2023e | 2024e | 2025e |
| Property, Plant and Equipment (Net) | 0.02 | 0.00 | -0.19 | -0.42 | -0.69 |
| Goodwill | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Intangible Assets | 13.7 | 13.8 | 12.5 | 10.9 | 9.0 |
| Right-of-Use Assets | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Other Non-Current Assets | 0.39 | 0.00 | 0.00 | 0.00 | 0.00 |
| Total Non-Current Assets | 14.3 | 13.8 | 12.3 | 10.5 | 8.3 |
| Current assets | |||||
| SEKm | 2021 | 2022 | 2023e | 2024e | 2025e |
| Inventories | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Accounts Receivable | 2.1 | 0.00 | 6.8 | 8.3 | 10.2 |
| Other Current Assets | 1.4 | 5.3 | 0.55 | 0.67 | 0.83 |
| Cash Equivalents | 10.2 | 14.6 | 27.1 | 41.9 | 59.4 |
| Total Current Assets | 13.7 | 19.9 | 34.5 | 50.8 | 70.4 |
| Total Assets | 27.9 | 33.7 | 46.8 | 61.3 | 78.7 |
| Equity and Liabilities | |||||
| Equity | |||||
| SEKm | 2021 | 2022 | 2023e | 2024e | 2025e |
| Non Controlling Interest | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Shareholder's Equity | 25.1 | 31.2 | 39.5 | 52.7 | 68.3 |
| Non-current liabilities | |||||
| SEKm | 2021 | 2022 | 2023e | 2024e | 2025e |
| Long Term Debt | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Long Term Lease Liabilities | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Other Long Term Liabilities | 0.08 | 0.00 | 0.00 | 0.00 | 0.00 |
| Total Non-Current Liabilities | 0.08 | 0.00 | 0.00 | 0.00 | 0.00 |
| Current liabilities | |||||
| SEKm | 2021 | 2022 | 2023e | 2024e | 2025e |
| Short Term Debt | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Short Term Lease Liabilities | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Accounts Payable | 0.79 | 0.00 | 3.0 | 3.7 | 4.6 |
| Other Current Liabilities | 0.33 | 2.5 | 3.3 | 4.0 | 5.0 |
| Total Current Liabilities | 2.8 | 2.5 | 6.4 | 7.7 | 9.5 |
| Total Liabilities and Equity | 27.9 | 33.7 | 46.8 | 61.3 | 78.7 |
| Cash flow | |||||
| SEKm | 2021 | 2022 | 2023e | 2024e | 2025e |
| Operating Cash Flow | -1.9 | 6.8 | 16.1 | 18.4 | 21.1 |
| Investing Cash Flow | 0.00 | -3.7 | -3.6 | -3.6 | -3.6 |
| Financing Cash Flow | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
Rating definitions
The team
Disclosures and disclaimers
Contents
Comments on the third quarter
Estimates and valuation
Investment thesis
Quality Rating
Financials
Rating definitions
The team
Download article