Net Sales came in at SEK7.6m, 33%y/y, in line with our estimated SEK7.6m (deviation 0%). New contracts primarily drove sales growth as USDSEK decreased by 1% q/q, based on our estimate. EBITDA came in at SEK3.6m, corresponding to an EBITDA margin of 47% (EBITDA SEK2.7m, EBITDA-margin 47% last year). This is below our estimate of SEK4.1 (deviation -13%). OPEX was above our expectations and deviated by 22%. The main reason for the deviation is increased personnel costs related to new employment and less vacation time during the period.

The USDSEK tailwind has turned into a headwind during the last quarter of the year, decreasing by 1% on average.

AVTECH expects a prototype version of its Dashboard to be ready for customers to use in the first quarter. The Dashboard will allow each customer to monitor each flight’s overall statistics and outcomes independently. This transparency enhances credibility and streamlines the work for AVTECH’s team during testing periods, as customers can now track the results from day one themselves.

AVTECH expects the first version of the Flight Speed Optimizer for ClearPath to be ready for customer trial at the end of Q1 2024, which it expects customers to trial in Q2 2024. Flight Speed Optimizer aims to continuously manage the flight speed to optimize the fuel efficiency of the aircraft. Today, the aircraft’s speed continuously varies during flight, controlled by the flight computer. The computer calculates an optimal airspeed at each point based on the airline’s priorities (time/fuel), current weather conditions, and the aircraft’s weight. The flight computer’s limited weather input and capacity sometimes lead to suboptimal speed profiles. AVTECH’s flight speed optimizer identifies the optimal speeds in each flight segment, providing pilots with a simple tool to optimize them. The result is fuel and time savings, which vary from flight to flight. Additionally, the optimization appears to result in the aircraft flying at a more consistent speed.

In his CEO letter, David Rytter stated that AVTECH invests to maintain high sales and promote future growth. The company welcomed an interim sales manager with over 25 years of expertise and allocated SEK2.0m to expand its product portfolio into areas with synergistic potential. Areas under consideration include enhancing support for airline ground staff and air traffic control to optimize airport traffic flow. AVTECH is exploring partnerships and co-financed research with various entities beyond airlines to support these initiatives.

AVTECH had good momentum with customer intake, signing one agreement in Q4 2023 with Wizz Air UK and one after the quarter ended with SAS. We estimate the total contract intake is worth SEK3.4m annually at the mid-point.

AVTECH signed an agreement with Wizz Air UK, a low-cost carrier operating from the UK and a subsidiary of Hungarian-based Wizz Air. The deal is for Aventus and SIGMA in-flight services, has a three-year duration, and is worth SEK1.1m—1.6m, depending on the EUR/SEK exchange rate.

We estimate the agreement is worth SEK0.5m annually at the midpoint. The contract only covers Wizz Air’s UK operations, with only 18 aircraft operating. Using this figure, we estimate AVTECH earns SEK0.025m per aircraft annually, in line with other agreements. The entire Wizz Air group has 187 aircraft operating. Thus, we estimate the upsell potential for this specific service to be worth cSEK5m annually at the midpoint over time.

AVTECH announced after Q4 2023 ended that it has signed a two-year agreement for ClearPath with SAS with an expected value of SEK5.0m-6.5m, dependent on the number of SAS group aircraft and flights operating with the service. According to Planespotters, SAS has about 90 aircraft operating. We estimate the contract is worth SEK2.5m-3.3m annually, with a mid-point of SEK2.9m.

AVTECH has stated that it has deployed its services on the first batch of aircraft for SAS and that commissioning on future aircraft types is underway. We are unsure about the timeline for the batches, which adds short-term uncertainty to our estimates.  

Key contracts and estimated expiration dates can be seen in the table below.

The contract with Southwest, the primary customer, does not expire until 2026-06. Hence, we believe there are limited downside risks to AVTECH’s estimates over the next two years, absent a significant event affecting the entire airline industry, such as a pandemic. However, AVTECH has a significant USDSEK exposure, a known unknown risk.

Before the last two agreements, AVTECH stated it had about 1,500 aircraft trialing or scheduled to trial its services. We did not get an updated number of aircraft, and we adjusted this figure to 1,400 aircraft after the agreements. However, we expect the pipeline to grow continuously.

We estimate AVTECH’s pipeline (of 1,400 aircraft) to be worth SEK27m-43m, with a mid-point of SEK35m. The low end assumes Aventus pricing, while the high end assumes ClearPath. Combining the two would value the pipeline at SEK70m.

CEO David Rytter stated in his December update that AVTECH has three legacy airlines trialing ClearPath and Aventus. We believe SAS was one of them. Hence, we believe one airline is trialing Aventus and the other ClearPath, with an expected end of the trial in Q1 2024. After the trial, we expect one to two-quarters of negotiations. Thus, we are hesitant to expect these in Q1 2024. However, in the same update, CEO David Rytter states AVTECH is working on simplifying the contract process, primarily by reducing the contract length, which he hopes will result in faster customer decision-making. 

We expect the remaining two airlines to have a value between SEK1.9m and SEK3.0m, whether for Aventus or ClearPath. AVTECH stated that an unspecified number of airlines will start trialing in January 2024. Below is a timeline of customer acquisition, expected end of trials, and product launches.

We increased our OPEX estimates and reduced our EBITDA estimates between 4.4%-7.3% between Q1 2024 and Q4 2024. Our next twelve-month estimates are as follows:

We increase our 2026e-2028e net sales growth by between 0-5% based on the current pipeline and the potential to upsell Southwest on ClearPath. We estimate Southwest expanding with ClearPath could add about SEK24m in revenue and the same amount to EBIT immediately. Our bull case assumes Southwest will expand its current agreement to include ClearPath in 2026e.

We believe there is a significant upside risk to our estimates, considering we only price in about 11% of the pipeline potential while barely considering Southwest could upgrade to include ClearPath.

During 2023, AVTECH signed four agreements, one of which was an extension of Southwest, which we estimate to be worth SEK15m annually at the mid-point. The new Southwest agreement added SEK2m in incremental sales versus the old agreement (at the midpoint). Excluding Southwest, we estimate these added about SEK4.9m in annual sales. Including only the incremental sales from Southwest, these contracts added SEK6.9m in annual sales.

Our 2024 incremental sales estimate, excluding the SEK2.9m we expect annually from SAS, is SEK3.9m. Considering how the pipeline looks, we find this fair-to-conservative and believe there are significant upsides to our estimates given a larger-than-expected conversion.

We increased our fair value range from SEK2.9-11.1 with a base case of SEK5.0 to SEK3.5-12.0 with a base case of SEK5.9. The main catalyst remains new airline agreements. The main risk remains Southwest customer concentration.

AVTECH trades at a premium on all relevant metrics except EV/EBIT 2025e. We believe this is fair considering the proven earnings power of the business and the pipeline potential.

Based on AVTECH’s operational performance since the pandemic, we have increased our financials rating from 3 to 4. Consequently, we have reduced our discount rate from 11% to 10%.

Our updated base case implies an EV/EBIT on 2024e of 20.8x, about a 20% premium of AVTECH’s two-year EV/EBIT NTM average of 16.5x. The NTM EV/EBIT multiple is 14.5x, below its historic average. Considering the business stability and improved growth prospects, we believe AVTECH should trade in line or at a premium to its historical valuation. We expect customer agreements to catalyze the share.