1. business and industrial

COMPANY ANALYSIS 28 January 2015
Summary
Avtech
(AVTCHb.ST)
The Pivotal Point For AVTECH



AVTECH is a leading software company within the aviation
industry. The company is currently on the verge of
significant growth and profitability with its Aventus
NowCast Descent product and will soon start to expand its
offering within the full flight envelope market.
List:
Market Cap:
Industry:
CEO:
Chairman:
First North
449 MSEK
Information Technology
Christer Staaf
Lars GV Lindberg
OMXS 30
AVTECH is positioned for growth due to the largely
untapped market and Southwest Airlines being a
paramount reference customer to secure future Aventus
NowCast contracts. Escalation in regulatory pressure from
the US and Europe will most likely lead to more attention
for AVTECH’s solutions.
Avtech
10
8
6
4
2
0
28-Jan
At an entity level, the DCF and multiple analysis indicates a
value of 7 SEK per share with a cash position of
approximately 40 MSEK. Thus, future revenue growth is by
large priced in. The bear and bull case scenarios indicate
4.5 SEK and 15 SEK respectively. EV/EBIT scenarios
indicate a share price between 7 – 10 SEK per share.
28-Apr
27-Jul
25-Oct
23-Jan
Redeye Rating (0 – 10 points)
Management
Growth prospect
Ownership
8.0 points
6.0 points
Profitability
1.0 points
6.5 points
Financial strength
5.0 points
Key Financials
Revenue, MSEK
Growth
EBITDA
2012
11
2013
10
2014E
15
2015E
43
2016E
78
0%
-8%
45%
190%
84%
-6
EBITDA margin
EBIT
Pre-tax earnings
Net earnings
Net margin
9
-2%
-10
28
22%
-4
36%
5
24
-86%
-95%
-30%
13%
31%
-10
-10
-10
-10
-5
-5
5
5
24
24
-90%
2012
2012
0
-56%
-10
EBIT margin
Dividend/Share
EPS adj.
P/E adj.
EV/S
EV/EBITDA
-6
-56%
-102%
2013
0.00
-0.78
-3.9
4.0
-7.2
2013
-31%
2014E
0.00
-0.23
-13.0
13.5
-24.1
2014E
13%
2015E
0.00
-0.08
-99.9
27.7
-1424.4
2015E
Share information
Share price (SEK)
Number of shares (m)
Market Cap (MSEK)
Net debt (MSEK)
8.0
56.5
449
-42
Free float (%)
Daily turnover (’000)
60 %
1000
31%
2016E
0.05
0.10
83.4
9.6
43.5
2016E
0.34
0.42
18.8
4.9
13.9
Analysts:
Philip Skogby
[email protected]
Important information: All information regarding limitation of liability and potential conflicts of interest can be found at the end of the report.
Redeye, Mäster Samuelsgatan 42, 10tr, Box 7141, 103 87 Stockholm. Tel +46 8-545 013 30. E-post: [email protected]
COMPANY ANALYSIS 28 January 2015
Redeye Rating: Background and definitions
The aim of a Redeye Rating is to help investors identify high-quality companies with attractive valuation.
Company Qualities
The aim of Company Qualities is to provide a well-structured and clear profile of a company’s qualities (or operating
risk) – its chances of surviving and its potential for achieving long-term stable profit growth.
We categorize a company’s qualities on a ten-point scale based on five valuation keys; 1 – Management, 2 –
Ownership, 3 – Growth Outlook, 4 – Profitability and 5 – Financial Strength.
Each valuation key is assessed based a number of quantitative and qualitative key factors that are weighted differently
according to how important they are deemed to be. Each key factor is allocated a number of points based on its rating.
The assessment of each valuation key is based on the total number of points for these individual factors. The rating
scale ranges from 0 to +10 points.
The overall rating for each valuation key is indicated by the size of the bar shown in the chart. The relative size of the
bars therefore reflects the rating distribution between the different valuation keys.
Management
Our Management rating represents an assessment of the ability of the board of directors and management to manage
the company in the best interests of the shareholders. A good board and management can make a mediocre business
concept profitable, while a poor board and management can even lead a strong company into crisis. The factors used
to assess a company’s management are: 1 – Execution, 2 – Capital allocation, 3 – Communication, 4 – Experience, 5 –
Leadership and 6 – Integrity.
Ownership
Our Ownership rating represents an assessment of the ownership exercised for longer-term value creation. Owner
commitment and expertise are key to a company’s stability and the board’s ability to take action. Companies with a
dispersed ownership structure without a clear controlling shareholder have historically performed worse than the
market index over time. The factors used to assess Ownership are: 1 – Ownership structure, 2 – Owner commitment, 3
– Institutional ownership, 4 – Abuse of power, 5 – Reputation, and 6 – Financial sustainability.
Growth Outlook
Our Growth Outlook rating represents an assessment of a company’s potential to achieve long-term stable profit
growth. Over the long-term, the share price roughly mirrors the company’s earnings trend. A company that does not
grow may be a good short-term investment, but is usually unwise in the long term. The factors used to assess Growth
Outlook are: 1 – Strategies and business model, 2 – Sale potential, 3 – Market growth, 4 – Market position, and 5 –
Competitiveness.
Profitability
Our Profitability rating represents an assessment of how effective a company has historically utilised its capital to
generate profit. Companies cannot survive if they are not profitable. The assessment of how profitable a company has
been is based on a number of key ratios and criteria over a period of up to the past five years: 1 – Return on total
assets (ROA), 2 – Return on equity (ROE), 3 – Net profit margin, 4 – Free cash flow, and 5 – Operating profit margin or
EBIT.
Financial Strength
Our Financial Strength rating represents an assessment of a company’s ability to pay in the short and long term. The
core of a company’s financial strength is its balance sheet and cash flow. Even the greatest potential is of no benefit
unless the balance sheet can cope with funding growth. The assessment of a company’s financial strength is based on a
number of key ratios and criteria: 1 – Times-interest-coverage ratio, 2 – Debt-to-equity ratio, 3 – Quick ratio, 4 –
Current ratio, 5 – Sales turnover, 6 – Capital needs, 7 – Cyclicality, and 8 – Forthcoming binary events.
Important information: All information regarding limitation of liability and potential conflicts of interest can be found at the end of the report.
Redeye, Mäster Samuelsgatan 42, 10tr, Box 7141, 103 87 Stockholm. Tel +46 8-545 013 30. E-post: [email protected]
COMPANY ANALYSIS 28 January 2015
Table of contents
Investment case ....................................................................................... 5
Catalysts .................................................................................................. 8
Valuation .................................................................................................. 9
AVTECH an Acquisition Target? .................................................................... 9
Background ............................................................................................ 11
Products and Services ............................................................................ 12
Core of AVTECH’s Aventus Business - Wind Feed Data .................................. 12
Aventus NowCast Descent ........................................................................ 13
Competitive features of Aventus NowCast Descent ....................................... 15
Challenges of Aventus NowCast Descent ..................................................... 16
Aventus Cruise ........................................................................................ 17
Competitive advantages – Aventus Cruise................................................... 17
Challenges of Aventus Cruise .................................................................... 18
Wake Vortex & HAL Project ....................................................................... 18
Additional software solutions ..................................................................... 19
Environmental analyzer ......................................................................... 19
Efficiency analyzer ................................................................................ 20
Competitive features conclusion ................................................................ 20
AVTECH’s Revenue Model ....................................................................... 21
Sales model ......................................................................................... 22
Aventus Nowcast - Fundamentals .............................................................. 22
Pay-per-use / Uplink pricing ...................................................................... 23
Accumulated benefit model ....................................................................... 25
Consultancy Revenues.............................................................................. 26
Conclusion .............................................................................................. 26
Market Analysis ...................................................................................... 28
AVTECH’s market – General regulatory drivers ............................................ 28
Introduction – Pro regulatory environment for CDA ...................................... 29
Regulatory pressure for CDA .................................................................. 29
AVTECH aligned with significant future industry aviation growth .................... 31
Market fundamentals that indicate increased utilization of Aventus products. 33
Analysis of the Competition ....................................................................... 34
Aventus NowCast Descent ...................................................................... 34
Aventus Cruise ..................................................................................... 35
Prospective customers for its products........................................................ 36
Low cost carriers ................................................................................... 37
Cargo .................................................................................................. 37
Military ................................................................................................ 38
Summary: Potential in market segments ................................................. 38
Current customers evaluation .................................................................... 39
Company analysis
3
COMPANY ANALYSIS 28 January 2015
Southwest - contract implications and future ............................................ 39
Potential in Selling Aventus Cruise to SouthWest....................................... 40
Etihad Airways Revenue potential .............................................................. 41
Oil Price – Is it really an issue of major long-term significance? ..................... 42
Estimates................................................................................................ 44
Introduction ............................................................................................ 44
Southwest Airlines – Larger airlines ......................................................... 44
Etihad estimates – Mid/Smaller Commercial Airlines .................................. 45
Aventus Cruise ..................................................................................... 45
Ascent revenues ................................................................................... 46
Complete Yearly Estimates ........................................................................ 47
Aventus software division....................................................................... 47
Differences from company estimates ....................................................... 47
Savings and benefit levels assumptions ................................................... 48
Consultancy estimates ........................................................................... 49
Valuation ................................................................................................ 51
DCF ....................................................................................................... 51
Earnings and Multiple Analysis ................................................................... 53
Scenario Analysis ................................................................................... 56
Bear case scenario ................................................................................... 56
Assumptions......................................................................................... 56
Base case scenario................................................................................... 57
Assumptions......................................................................................... 57
Bull case scenario .................................................................................... 58
Assumptions......................................................................................... 58
Summary Redeye Rating ........................................................................ 59
Rating changes in the report ..................................................................... 59
Income statement/Balance sheet…………………………………………………….60
Disclaimer……………………………………………………………………………………..62
Company analysis
4
COMPANY ANALYSIS 28 January 2015
Investment case
AVTECH pillar contract
with SWA means
significant growth
potential ahead
Extension to Cruise for
SWA likely and will pose
significant earnings for
AVTECH
AVTECH is the current world-leader in software solutions for full flight and
time-based operations (timeliness and capacity of flights). After years of
significant research and commercialization issues, the company has
materialized a 5 year contract for the Aventus NowCast Descent product
with Southwest Airlines (SWA), proving its commercial viability with one of
the largest commercial airlines in the world. The contract is a pivotal point
for the company’s future core business within Aventus Descent and its
extension to the full flight envelope. The contract with Southwest is and will
be paramount to enhance its cash flow in the coming years. The contract is
also important in order to extend the product portfolio into new segments
and to successfully attain several other related customers in its
procurement processes within the segments of low-cost airlines, legacy
carriers and cargo airlines. Currently the company is participating in
approximately 100 procurement processes and where of 40-60 are
estimated to be significant revenue generators. 10 contracts of various sizes
are estimated to be attained in the next 6-24 months according to our
analysis. The actual materialization of the contracts will be highly
dependent on the type of client. It is estimated that the majority of
contracts will be derived from low-cost carriers whom actively seeks to
enhance their cost-position among its peers.
The extension to full flight systems as the Aventus Cruise is important for
further procurement processes and is a significant driver of value as the fuel
savings can be between 7-30 times larger than Aventus Descent.
This scenario is likely due to AVTECH’s existing relation to SWA and the
almost non-existent competition from other flight planning providers. We
believe that SWA would most likely prefer to utilize the same system for the
best utility and simplification purposes. Aventus Cruise for SWA would
significantly improve its chances to enable time based operations and fuel
savings.
In the following picture we illustrate the potential in terms of operating
profit (EBIT) of a SWA type of contract when utilizing all of the three
different parts (constituents) of AVTECH’s systems:
Earnings power of larger sample contract for all constituents
*Redeye research
Company analysis
5
COMPANY ANALYSIS 28 January 2015
Significant cash flow
potential from additional
larger contracts
Thus the total EBIT from a key contract such as Southwest alone, can be
between 10 – 30 MSEK, in the lower interval symbolizing conservative
assumptions and more optimistic in the higher intervals.
By far the most important factor for this company and the stock is
essentially its speed in securing new contracts to ensure a strong position in
the market for full flight systems which would lead to fulfillment of
expectations. We believe the company will be able to leverage its current
position as the number one software solution provider for descent
approaches especially, leading to a total of five orders in 2015. The revenue
reliance on Southwest will gradually diminish when looking into 2016, thus
reducing contract risk. Aventus NowCast Descent should be enough to
motivate the majority of the value today, but significant attention should
also be directed to the possibility of temporary momentum in this market
due to intense competition.
AVTECH’s niche strategy
pivotal in successfully
extending its product
portfolio and gaining
market share
AVTECH has been able to develop a competitive edge, although temporary,
by focusing its efforts on the specialization in small undeveloped niche
segments within full flight solutions, such as Aventus Descent, an optimized
continuous descent approach (CDA). The company will now expand to the
more competitive and broad arena of full flight execution, where flight
planning providers are the dominant force, which will likely become more
intense over time due to its large revenue potential. This strategy ensures
that the company will be a first mover, enjoying large market share in new
areas, often unexplored, which are usually overlooked by the competition.
The timing for establishing a stronghold in the niche segments as within the
optimized CDA solution realm and full flight execution systems is
impeccable from a regulatory perspective. Regulatory measures from the
US government through the NextGen Program and the European
Commission through Eurocontrol and SESAR requires solutions such as
AVTECH’s in order to achieve the goal of time-based operations and
decrease the emissions by decreasing the fuel consumption. All the above
factors will drive significant demand for AVTECH’s products in the coming
years.
Another factor which indicates strong future demand for AVTECH’s
products is that airlines are in general moving down the ladder of priority in
fuel efficiency, especially among the low-cost carriers. Essentially, this
would lead to more attention upon smaller but still significant fuel savings
solutions such as optimized continuous descent approach solutions.
However, for the traditional airlines the procurement processes might
become severely extended which is often caused by bureaucratic
management and insufficient resources of Airlines to handle efficiency
measures.
Largely undeveloped
competition – Can enjoy
significant traction in
gaining market share
The company will likely enjoy significant traction in especially its Aventus
NowCast Descent strategy and then Aventus Cruise because the
competition being is largely non-existent. Currently Boeing is the main
competitor in negotiations but with a less efficient solution. SITA has
arguably a weaker solution for the Descent solution, judging by the
contracts achieved for AVTECH along with the detail in measuring fuel
Company analysis
6
COMPANY ANALYSIS 28 January 2015
Flight planning providers
are the likely competitors
of AVTECH rather than
larger actors
savings along with the sophisticated altitude feature.
SITA has, though, recently established contracts with some Asian Airlines
and is likely to become a competitor in negotiations for its cruise solutions
but in a largely untapped market where there is room for competition.
NASA ‘s solution EDA (Efficient Descent Advisor) which is a voice-based
communication solution, set for commercial release in 2016, is inefficient
for pilots compared to datalink communication directly to the FMS (Flight
management system) like AVTECH’s systems. Competitive products
relative to AVTECH’s Descent/Cruise systems will most likely be developed
by small market participants like flight planning providers Sabre, SITA or
LIDO which fit its core business well. The larger market actors as Boeing,
GE, Honeywell, and Airbus have few incentives to develop its business in a
small niche where significant revenue potential does not exist and would
cause strong misalignment to its core product portfolio focus. Essentially,
the largely undeveloped competition will give AVTECH significant time to
gain traction and scale in its current product portfolio.
We believe margins will over time increase as the meteorology providers
Panasonic and UKMET RSA’s (revenue share agreement) will become more
favorable for AVTECH due to the scale of AVTECH’s contracts. Also,
different pricing models for markets and operators will most likely lead to
favorable outcomes in pricing negotiations. We therefore believe that the
EBIT margin would be approximately 50 percent in the coming years for
the Aventus software division. The revenues supported by its Descent
product and Cruise is expected to have a CAGR of approximately 70 percent
until 2017. After this period, competitors such as flight planning providers
should catch up on the trend and would intensify their operations towards
better or equivalent products causing downward pressure upon revenues
and margins. Strong liquidity limits the financial risk until expected cashgeneration, and ensures the financing of the company’s endeavors in
development projects such as the Wake Vortex and further research
development of the full flight systems.
Wake Vortex along with
other possible projects
important in order to drive
long-term shareholder
value
Significant risks include
introduction of competitive
products on a relatively
short time-frame
A significant project that we believe can become its own business unit and
drive shareholder value in the longer term is the Wake Vortex project which
is in pre-commercial phase. With significant time-savings and regulatory
pressure for better safety systems, we believe that AVTECH can receive
revenues through but not limited to airport fees on airlines to meet
increased regulatory and airspace needs.
The company’s largest single risk is that full flight planning system
providers look for less competitive arenas and successfully develops
equivalent products, thereby bypassing the patent protection, and in 6-18
months AVTECH would face serious competition in its procurement
processes. This would significantly impair the projected intake of contracts
and revenue estimates. Other significant risks include prolonged
procurement processes due to regulatory or organizational circumstances,
risk of significant estimation deviation due to limited pricing transparency
of current contracts, and the possibility of extended procurement processes
due to priorities of cost-savings actions.
Company analysis
7
COMPANY ANALYSIS 28 January 2015
Catalysts
Five catalysts, which components are expected to drive or destroy value, are
mentioned in the following bullet-points :
 Southwest extends its Aventus NowCast Descent agreement in to
Aventus Cruise. There are two major reasons for this; Southwest
does have a clear intention of an flight phase efficiency system and
that Airlines generally want to standardize its systems. The viability
of this argument, in the context of conquering other prospective
customers is more uncertain due to potential existing relationships
with flight planning providers. However, a contract with SWA for
Aventus Cruise would come to a substantial benefit in future Cruise
procurement processes with other airlines.

New standard-setting for low-cost carriers and legacy airlines to
implement and utilize Aventus NowCast Descent and Cruise
solutions due to both its implementation among majors and
increased regulatory pressure. This argument is especially accurate
for the low cost carriers as they are significantly more eager to utilize
efficiency measures to gain cost-advantages than legacy carriers
whom will but generally tends to be slower to adapt.
In terms of revenues there is still significant uncertainty particularly
the benefit level and actual savings paid for going forward which
could significantly impair or confirm the long-term estimates as well
as volatility in currency/fuel prices.

Competition lagging behind is a likely scenario due to that AVTECH
must first prove itself among a few airlines before catching the
attention of majors. This ensures sales momentum in the shortterm. Depending on the time-frame until producing a similar
product, which we estimate is between 6-24 months, under the right
circumstances, the company could face serious competition in the
procurement processes possibly hindering a large part of the
projected growth. Pricing power will likely be less important when
savings are significantly larger than competitors. SITA and Boeing
has similar solutions but have not succeeded in procurement
processes with AVTECH. SITA seems like a promising bet as
competition in the short-term for its cruise solutions, as it has
established itself to some degree for Asian airlines.

A lower RSA rate by more differentiated geographical position
composition of sales will most likely lead to a margin expansion. The
possibility to choose another operator with a lower RSA rate but
similar quality, proven by test results, would inflict price pressure on
the current providers which would induce higher margins than
expected. Furthermore, even though AVTECH cannot negotiate a
lower rate it is certainly possible that the company can expand its
fuel savings by 10-50 percent - increasing its top line, if and only if
Panasonic successfully implements its planned investments and/or
if another meteorological provider provides better forecast intervals
within the relevant regions.
Company analysis
8
COMPANY ANALYSIS 28 January 2015

Shorter finalization of procurement processes due to significant
leverage by the major reference customer, regulatory pressure for
time and performance based (Noise and fuel savings) operations,
concentration on low-cost carriers, changed prioritization of fuel
savings and increased efforts in sales by for example focusing on
pilot collectives. All of these factors are likely in short-term value
drivers. The Aventus Descent solution itself is estimated to be the
primary driver for finalizations of the procurement processes, as the
company has a unique and commercially superior product for the
moment. This could essentially mean an abundant amount of
contracts in a short time frame. However, the case for prolonged
procurement processes can be because of legacy airlines that already
concentrate their efforts on other measures and bureaucratic
organizations that are unwilling to change.
Valuation
Company rightfully trades
with significant
expectations of fulfilment
of contracts
The company currently trades as future contracts will be successful on a
DCF and multiple basis, but with some risk premium, with all ten contracts
accounted for and the costs accounted for as maintenance. Redeye stands
firm that attaining new contracts will be achieved but from a time
perspective there might be significant delays and not in the volume
management expects. Our base case indicates a price per share of 7 SEK
reflecting our most likely scenario with bear and bull case being 4.5 and 15
SEK per share reflecting our most likely negative and positive scenario
respectively.
On an entity level the company seems fairly valued around 7-8 SEK with an
EV/EBIT level of 15-16 for 2016.
The EV/EBIT multiple on an adjusted basis for the Aventus software
division is approximately 11 for 2016. Redeye believes the company could be
trading up to an EV/EBIT multiple of 15-17 on an adjusted basis in 2016
leading to a value of 9-10 SEK per share in the future. For more information
regarding the assumptions and reasoning behind the valuation see the
valuation section.
AVTECH an Acquisition Target?
The FMS or the flight
planning system providers
likely to manage a buyout
– Must likely be at a
significant premium to
freeze out current
ownership
Due to AVTECH’s position as a leading provider in a high-growth business
industry many larger operators would probably be interested to acquire
parts or the whole company for the technology and/or potential market
share. GE, Boeing, SABRE, Airbus, Honeywell and Panasonic would likely
be interested in acquiring the company. The majority of the aforementioned
the companies has co-operated with in several past and present projects like
the Wake Vortex. Redeye believes all of the aforementioned would pay a
significant premium and are able to acquire the company. However, we
believe that the primary owners to be reluctant to endeavor to take
significant market share of the flight operations industry. GE, Boeing and
Honeywell being the FMS (Flight management system) providers for
aircrafts today would certainly be interested in adding AVTECH’s products
as complements and as an additional recurring cash-flow generator. It
Company analysis
9
COMPANY ANALYSIS 28 January 2015
would also strengthen its eco-friendly image by providing significantly
detailed level data of emissions on city level.
Some of the Flight planning providers have ability to raise cash or is well
funded to acquire AVTECH to strengthen its position or in order not to lose
its position. Sabre would likely pay a significant premium to improve its
standing for its current solution and possible additional revenue sources
segments. A plausible scenario in order for the management and ownership
to give up their premium position as a niche software provider, along with
its strong R&D orientated team would be a multiple of 20-25 for forward
EV/EBIT 2016.
Company analysis
10
COMPANY ANALYSIS 28 January 2015
Background
AVTECH has been in existence since 1988, and has since then focused on
Aviation products to enhance efficiency, accuracy and safety of airline
operations. The company currently has offices in Stockholm, Dubai and
Toulouse with approximately 10 employees and has been listed on First
North since 2012. The company was in the brink of bankruptcy in 2013 and
as a consequence of the successful issue of shares of the restructuring
programme the company was able to survive. Subsequent issuance of shares
in September 2014 have contributed to a substantially stronger financial
position to ensure its future activities for several years in the future.
AVTECH destined to
deliver results with
influential people and
decades of expertise
Founding members Christer Staaf the current CEO and Lars Lindberg were
essential for the foundation of the company’s business today. Lars Lindberg
is today spearheading the Wake Vortex project and conceptual development
of the Aventus system. Many of the employees, including the
aforementioned, have long histories as commercial/fighter pilots, with deep
connections and background in management positions of airlines. Bo
Redeborn, member of the board, was the principal director at Eurocontrol
until February 2014 and held several senior positions in SESAR following
its start in 2004. These are just a few of the influential people AVTECH are
attracting.
The airline industry has traditionally been and is still to a large extent
bureaucratic and inefficient, which Lars Lindberg and Christer Staaf
witnessed firsthand during their careers as pilots. In short, they
experienced the brutal inefficiency of the flight management systems and
air traffic management. This set the founders into a spiral to create
disruptive products to solve these problems. They also realized the
interdependency of having performance based operations with time based
operations. To solve these two fronts they decided to concentrate operations
on developing modules for which the aircraft is most affected by - the wind.
These instruments became known as the Aventus NowCast in order to
implement time based operations and its subsequent fuel savings. The first
Aventus flight took place already in 2007 followed by a subsequent approval
of a patent license in 2009. The pivotal point came with the Aventus
Nowcast development and a pilot order in 2012 when it was in early phase
development. This was the foundation for testing and improving the
product, which in 2014 resulted in a subsequent release to Southwest. The
order is pivotal in indicating the earnings power to the market and to retain
additional future customers. Another project is the Wake Vortex which has
been in the research stage during the last couple years and is now on the
verge of testing in order to commercialize it.
Company analysis
11
COMPANY ANALYSIS 28 January 2015
Products and Services
In this section, a brief background of the product fundamentals will be
given. Then, all products of significance will be presented and analyzed.
Additionally, each major product model’s competitive features and
challenges will be presented.
Core of AVTECH’s Aventus Business - Wind Feed Data
Timely wind feed data
essential to AVTECH’s
product
Vital to the success of the optimized CDA and full flight systems of AVTECH
is the patented algorithm of the wind optimization module which can only
work properly if wind data feed is up to date. This is to ensure that the flight
path becomes properly optimized in order to maximize the potential
benefits in terms of fuel savings and timeliness. Providing old wind feed
data is more likely to have a negative impact versus not providing it at all.
The wind feed data is currently gathered through two primary sources
namely UK MET and Panasonic but there are also several other providers.
Accurate and timely data of meteorological conditions, primarily wind, is
vital in order to increase the efficiency of the CDA and full flight systems.
The traditional approach for utilizing similar technology is for example the
US RAOB system which is similar to the UN WMO (World meteorological
system). The traditional meteorological systems features can be derived
from the table below.
Traditional Meterological Systems
• 60 Year. Old Balloon Technology at 69 locations
• 2x Daily sounding, high latency (2-4 hours)
• Inaccurate positioning
• No Expansion plans
*Redeye Research
The high latency with inaccurate positioning does not allow AVTECH’s
systems to work optimally at all, which would not allow the algorithms to
calculate the best route.
With Panasonic, the company is able to fully leverage the wind feed data but
mostly in the US, which Panasonic plans to broaden in the future, the
timing of these measures are currently unknown.
Features of Panasonic's Meteorlogical System
• State-of-the-art sensors & SATCOM at 250 locations in N/S America
• Continous soundings
• Real time (no latency)
• GPS time/date/position
• Further expansion planned - 2600 daily soundings to 7000 soundings
*Panasonic, Redeye Research
Panasonic uses a 4DVar process which basically enables the company to
optimize its forecast. With no latency and continuous updates up to a
forecast interval of 60 minutes, the accuracy and utilization of the wind feed
data increases dramatically versus traditional meteorological systems. The
resolution and detail is also significantly different from traditional systems,
Company analysis
12
COMPANY ANALYSIS 28 January 2015
Decrease in forecast
interval could increase fuel
savings by 10-50 percent
approximately 30 times better, allowing more accurate wind forecasts. If
Panasonic is able to decrease the interval of forecast interval/soundings the
efficiency of the systems could theoretically increase up to 60 minutes.
Depending on the forecast interval decrease the amount of fuel savings
could increase by 10-50 percent.
The convergence to real-time data is essential because it maximizes the
utility of the algorithm and thus it generates more fuel savings. Panasonic
acquires among other techniques wind feed data from onboard weather
sensors flying on commercial aircrafts. Expansion of these sensors to more
aircrafts along with other technology innovations could make the forecast
interval shorter and thus more accurate. We estimate that Panasonic, if it is
to remain as leader in the field, and to maintain its RSA, it must continue its
investments in this field. The wind optimization module of Aventus, along
with Panasonic’s co-operation is powerful enough to calculate the
incremental amount of fuel consumption of a certain forecast error.
Tests of data providers
could make the RSA
agreements more
favorable
UK Met is primarily a European wind data feed provider, although
Panasonic Avionics have systems in place for Europe and Asia too but with
less accuracy. The two providers differs significantly in the Revenue share
agreements (RSA) with AVTECH which we estimate being between 25 – 50
percent. We expect that AVTECH will perform more tests to confirm that
the large spreads of the RSA’s are actually economically warranted.
Aventus NowCast Descent
Aventus NowCast is a system that utilizes an optimized Continuous Descent
Approach through meteorological calculations of wind data with datalink
communication to the FMS (Flight Management System).
Aventus NowCast designed
to be effortless for the pilot
Prior to the Top of Descent (TOD), the aircraft’s 4D (3 standard dimensions
+ time) trajectory or flight plan report is sent to Aventus System where the
optimization algorithm ensure that the most critical winds are taken into
account for the landing. The data is then communicated back to the FMS
and then can be accepted by the pilot. Depending on the limitations of the
FMS, the airplane might not support a full 4D trajectory and a partial flight
plan report is then sent to the FMS instead. The difference between these
two plans is negligible in terms of fuel savings for Aventus Descent, but the
accuracy and forecast becomes significantly more accurate than traditional
meteorological approaches that are or could be essential for other projects
in the future like Wake Vortex.
With precise data of the wind dynamics, the FMS will counteract the head
or tailwind to meet time constraints and to avoid step-down approach. The
consequence is the least amount of fuel burn with an idle thrust during the
optimized CDA. The only requirement is that the pilot accepts the datalink
communication to the FMS.
Company analysis
13
COMPANY ANALYSIS 28 January 2015
AVTECH’s NowCast Descent solution as an optimized continuous descent
approach can be illustrated as the table below:
Visual representation of
Aventus Descent’s
optimized CDA and its
possible fuel savings
Representation of Avtech's NowCast Descent Solution
*Redeye Research
AVTECH has a patented wind optimization module which involves
calculating the trajectory of the aircraft in relation to the specific wind
circumstances to enable the aircraft to achieve an optimal CDA. The patents
also extend into ground based Air Traffic Control (ATC) systems which are
important for executing time based operations and wake analysis.
The patent’s utilization is primarily used in the descent phase from the
cruising altitude to landing, despite its secondary purpose of utilization in
wake vortex and full-flight operations. The patent is set to be protected until
2030. We regard the patent security as important from a technological
perspective but certainly not enough to protect them from competition as
we will outline later on.
Meteorological conditions
and primarily the wind
have substantial impact on
the achieved fuel savings
The fuel savings, depending on size of the aircraft (small – large) among
other factors, can be between 15 - 90 KG (kilogram) per descent. As the
image above depicts, the KG savings are approximately 15-45 KG for a
normal sized aircraft using Aventus NowCast Descent. Important factor for
calculating the benefits along with the wind optimization module is the
meteorological conditions and as such the savings can vary between the
direction and speed of the wind. Another factor is the altitude parameter
which affects speed and direction of the wind, which in turn the Aventus
NowCast Descent is fully dynamic for.
For example, as will be explained in the market analysis segment, contracts
such as Etihad can be greatly affected by the unique weather conditions of
the Arabian Gulf. To achieve timely flights and accurate flight planning in
the end, a requirement will be technology such as Aventus Descent solution.
The total potential benefits of a flight is set into perspective to a nonoptimized route, and to factors that affect the potential benefits, such as the
deviation from the actual wind dynamics received from the actual plane
sensor itself.
In terms of costs, the solution is low maintenance, if any, and does not
require significant investments when implementing the system along the
airplane operators. Furthermore, the solution does not require any approval
from governments. However, the solution can only be good as the aircraft
itself and the systems that are operational in the aircrafts and if outdated
the FMS might not handle a full optimized CDA.
Company analysis
14
COMPANY ANALYSIS 28 January 2015
Increase in runway
capacity along with
decreased sound are other
benefits
The Aventus Descent product is one of the implementations steps that must
be performed in order to succeed with optimal time-based operations.
Finally, operational evaluations in the case of Brisbane airport indicated a
40 percent increase in runway capacity due to the required time of arrival
being optimized by 9 seconds on average. This would however only work if
the aircraft systems utilize these technologies which would not cause any
unnecessary waiting times. Various studies have also shown that CDA
solutions can reduce 1-5 decibels, which is a significant factor to be
addressed to fulfill current and future regulatory requirements as well as
airport expansion needs.
Competitive features of Aventus NowCast Descent
AVTECH’s has a highly
scalable product with
short implementation
length

Technological Leap
Other operators currently in the market do not have the technology
to calibrate their systems in a manner that enhances fuel savings in
an equivalent or better manner than AVTECH. Essentially, the
additional fuel savings relative to the current sole competitor Boeing
makes Aventus Descent a preferable choice in the procurement
processes. The development time can be approximately 6 - 24
months for an equivalent system of an established developer, and
that is if and only if the company has proper connections and
experience within the echo-system of flights and know-how of flight
systems and its designs.
Boeing is the primary competitor in procurement processes but the
technology of their optimized CDA is currently inferior. We see that
companies like Boeing, Airbus, Honeywell and General Electric or
flight planning niched companies would be more interested in an
acquisition of the company directly, to avoid competition, and skip
the significant development costs required to surpass the quality of
the Aventus NowCast to become worthwhile, unless they want also
to engage in a major price war.

Scalability
Possessing a leading technological position along with a product that
is easily scalable makes the company positioned for high growth in
the coming years if the procurement processes shortens. There are
no restrictions from governments for implementation of its
products. The implementation period is small and can enjoy full
coverage within months of implementation reducing time to market.
Company analysis
15
COMPANY ANALYSIS 28 January 2015
Challenges of Aventus NowCast Descent

At what speed are the Giants (Boeing, Airbus, Honeywell,
General Electric) and smaller market participants able to
release a better or equivalent solution, and would they?
AVTECH with a limited staff constructed its product in 4 – 5 years,
and with the massive resources of Giants the steps to realize an
equivalent or better product might not take more than 6-24 months.
There are a few factors that suggest that AVTECH will be spared in
the short term from full-front competition. A) The Giants have not
yet realized the potential due to its early-commercial stage, but that
might realistically change within the next 12 months. B) More likely,
Giants would see more opportunities in developing their core
businesses. C) Giants would realize that the likelihood of a price war
could evaporate the margins, which would lead to a question
whether to acquire AVTECH relative to the costs of developing and
possibility of a better product. The integration of AVTECH’s already
established business and gain of direct market share is attractive.
When it comes to smaller competitors, like flight planning providers
there is certainly probability of them being the primary competition
to AVTECH, which is a consequence of their alignment to more
niche products in order to steer away from the abundant
competition in the core activities of cost savings for airlines.

Airline companies’ reluctance to implement solutions
The priorities of the airlines have a substantial impact on the choice
of CDA and TBO solution and its implementation period. As airline
operators can have up to 60-100 other solutions that must be
invested in first in order to achieve more savings during the full year.
As the technology is new and has only recently made a breakthrough
with a major airline company along with the fact that many airline
operators are moving down the ladder of priorities they will start to
consider optimized CDA solutions faster than the waiting times of
approximate four years for the Southwest contract.

Prolonged procurement processes
The Southwest procurement process took almost four years until the
deal was signed and will most likely act as a future reference to its
prospective customers. Although, it is not certain that airline
companies would concentrate their resources on CDA as there are
existing binding contracts with clients and other direct costs that the
airlines can cut first. However, with long procurement process with
one of the most innovative companies in the sector, it is not evident
that the company can gain further prospective customers as fast.

Patent intrusion and work arounds?
As a small niche actor acting among the largest companies in the
world it will not be easy to defend a patent effectively. Patents, if
attractive enough, are seldom effectively defended against Giants
with excess resources. Then, there is a possibility of the work around
of the existing product by most likely the flight planning providers,
Flight planning providers
the most likely competitors
going forward
Convincing companies in
this initial stage of its
benefits could take
significantly more time
than estimated
Company analysis
16
COMPANY ANALYSIS 28 January 2015
which does not resemble the patents specifications. If the product
also saves more KG per descent, it would most likely lead to full
denial of AVTECH’s current product in upcoming procurement
processes and could lead to significant price changes or the
abolishment of its current contracts.
Aventus Cruise
Aventus Cruise optimizes the flight route during the flight phase with an
optimal profile in relation to the unique meteorological conditions,
contributing to fuel savings and timeliness in heavy traffic flight routes. The
latter case is harder to set a pricing model as it must be set in context to
other airlines co-operation.
With regulatory pressure both from NextGen program, SESAR and
Eurocontrol should lead to greater utilization of efficient software for
airlines and airports in order to accomplish time and performance based
operations.
Larger potential in terms
of fuel savings for a Cruise
product – Must pass
several tests along with
more intense competition
to suceed
The wind optimization algorithm along with the database of thousands of
observations by meteorological conditions and primarily wind effects will
contribute to optimizing the flight route. If the company is able to
commercialize this product it could have great potential which would
exceed the benefits of Aventus NowCast descent alone. However, we deem
that the company has several obstacles before receiving these contracts,
including commercial tests, which must also be set in contrast to the large
variety of competition. It is important to note that the service Aventus
Cruise provides is quite different from most flight planning providers.
The planning phase ends when the throttles are pushed forward for takeoff,
that is when AVTECH Aventus systems starts to provide data to the crew
and the FMS in order to optimize the flight.
AVTECH might not be able to compete due to incremental savings of other
solutions unless they have sold in the CDA approach first and then for
simplicity use their solution instead (assuming the existing system is less
effective and inflexible). Another complementary product is a product for
the Ascent phase. Although, we deem Ascent would contribute to some
savings, these will be negligible relative to Cruise.
Competitive advantages – Aventus Cruise

Incremental Revenue Streams On Top Of Aventus NowCast
It is possible that the company could after successful
implementation use more of the company’s products like the
Aventus which poses an incremental revenue source by capitalizing
on the need of the airlines to standardize its solutions. The fuel
savings of full flight optimization is significantly larger than the CDA
approach alone. The deviations in weather, type of aircraft and
length of flights accumulates to potential in fuel savings can be
between 200 – 1000 KG.
Company analysis
17
COMPANY ANALYSIS 28 January 2015
Challenges of Aventus Cruise

Competitive environment
When it comes to the whole flight optimization the company is
among an abundance of competitors within flight planning systems
where some participants like SITA has a competitive solution.
Although the market is in initial stages and the company has already
won several contracts with the largest and most innovative airlines
in the world. Initially it is likely that it will be difficult to generate
sales directly on existing contracts and more probable if the initial
system sale of an optimized CDA has already been implemented
successfully (due to simplicity and reliance reasons).

Discrepancy in savings
In relation to the descent approach technology of AVTECH where
competitors do not have any competitive solutions, the Aventus
Cruise benefits vs the existing solutions is more unclear in terms of
savings. Many solution providers like SITA does indeed have up to
1800 KG but the problem is that they can rarely measure these on
the level AVTECH can. If Aventus Descent is already deployed for a
customer most airlines would likely have the same operator for
economies of scale and reliability.
Wake Vortex & HAL Project
Wake Vortex significant
regulatory pressure along
with a currently inefficient
system paves the way for
an alternative
Wake vortex is a system to measure the wake vortex created by the thrust of
the airplane. In the last 40 years the basis of safety procedures relative to
the wake vortices has been on theoretical calculations, the “rule-based
approach”. This is inefficient from many perspectives and finally ICAO in
November 2013, the United Nations agency, decided that Wake Vortex
system must be implemented. This development will speed the process of
introducing a commercial product where AVTECH is the proprietary rights
holder for the Wake Vortex system but co-operates along with partners such
as Honeywell, NATS and Panasonic.
However, the project is not near any commercialization phase at the
moment and needs to go through several control-gates during 2015 before
reaching the initial commercialization phase. The first commercial phase is
about increasing the distance between the aircrafts, for safety measures.
After that phase is finished the goal is to decrease the time that is not
needed relative to the rule-based approach, improving the timeliness of the
flights significantly and thus increasing runway capacity.
AVTECH’s system that accurately depicts the size, speed and effect of the
turbulence winds is in its early stage relative to Aventus which would
increase timely operations. This would lead to significant cost savings both
for airports and slots. The project currently uses LIDAR equipment from
Lockheed Martin, which is a laser technology, utilized at airports for
measuring the wake vortices. However, AVTECH will in the future utilize
sensors from airports and aircraft to gather and verify wind data.
Meteorological providers such as Panasonic are needed to measure the
vortices development and trajectory. Primarily heavy traffic zones should
Company analysis
18
COMPANY ANALYSIS 28 January 2015
benefit from this system which is why parts of the systems are currently
being tested in Dubai International Airport. Large savings can be made for
this airport if the runway capacity is increased. Several trials conducted in
the airports shows significant results on improving the safety and
timeliness of flights.
Redeye estimates around
40 airports are interested
of Wake Vortex – license
revenue model for Airports
is possible
With SESAR introducing the deployment phase of time-based operations in
2016 the commercialization phase could be within the later part of the next
five years. We estimate that there are around 40 airports that would be
interested in negotiating a deal for a Wake vortex system. There are many
ways that the company could achieve payment for these wake vortices,
including a license charged for the airports, by variable or fixed rate for
amount of usage.
In the beginning of 2014 the company entered into an air capacity
management contract with Heathrow Airport Limited (HAL) with other
industry leaders such as Siemens, Mclaren and NATS. We expect that
results from the implementation of these systems will be made evident in
the near future. AVTECH is responsible to deliver its Aventus systems
algorithms and associated trajectory engine to increase air traffic efficiency
at the airport. This will help drive the TBO development from the airport
side and ensure that air traffic can be properly handled at airports and will
also help to avoid unnecessary fuel costs.
Succesful outcome at HAL
will likely lead to wider
recognition and
implementation of Aventus
systems in the future
HAL will be a key airport for introducing the efficiency measures in other
airports and to comply with regulatory standards. We expect that results
from the implementation of these systems will be presented shortly.
Significant attention of Aventus systems could therefore spiral from a
successful implementation at HAL. A sign of this effect should be shown at
the Abu Dhabi airport where traffic is very intense in a small air-space
where Etihad have 80 percent of the total traffic. If Etihad decided to buy
the whole flight envelope, the airport at Abu Dhabi would become
significantly more time-based and Etihad would profit on these
circumstances.
Additional software solutions
The software add-ons are helpful in analysis of AVTECH’s own systems like
the Aventus Descent/Cruise technology or customer systems and services.
These products are not significant value-contributors but should be seen as
important complements to AVTECH’s product solutions.
Environmental analyzer:
The purpose of this tool is to calculate the emissions from the environment,
sound and greenhouse gases. The tool is then used to validate “green
approaches” for procurement processes or other clients whom seek these
services.
The company also has an extensive database collection. In order to secure a
reliable and optimized CDA the database of several thousands of flights are
compiled in order to continuously improve the descent profile and to
Company analysis
19
COMPANY ANALYSIS 28 January 2015
provide proof of concept. Additionally, this data can be used for other
purposes such as running scenario analysis and can be licensed out for
other products that deem it necessary such as full flight planning.
Efficiency analyzer
The program analyzes the actual flight versus an optimized flight trajectory
for fuel savings, emissions and time. The tool can then be utilized to check
whether the solution meet its targets and if there is a flight trajectory
and/or other approach that can be altered to improve efficiency. We see this
product as a complement to the primary products and not necessarily as a
stand-alone product other than the possible integration with Aventus
cruise.
Competitive features conclusion
Despite no durable
competitive advantage –
The niche strategy enable
the company to gain
traction in a largely
untapped market
The competitive features vary widely between the niche segment Aventus
NowCast Descent or the general full flight system for Aventus Cruise. The
distinctive edge of Aventus NowCast Descent is its wind optimization
algorithm allowing fuel savings along with that it enables time-based
operations in a market that is untapped and barely explored by competitors.
However, there is no definite proof that the company possesses any durable
competitive advantage with its Aventus Cruise or Descent product at the
moment due to work-around or patent intrusion. The strategy however, is
shareholder friendly by establishing a niche product, developing and
transforming it to a mass-market product where it is estimated that there
will be significant demand due to regulatory challenges. The company also
enjoys a clear first-mover advantage, potentially binding many airlines
before the entrance of competitors and thus securing its market position
and profitability in a relatively long-term horizon.
Wake Vortex being a highly disruptive technology and the HAL ACM
project is an example of the innovation power of AVTECH which will most
likely become revenue driving to some extent in the long term. Wake Vortex
is a component of achieving time-based operations along with eliminating
the rule-based approach within wake vortices which would save large
amount of money and is requested to achieve regulatory criteria’s. The HAL
project will gather further recognition from Airports and Airlines for its
Aventus systems.
Company analysis
20
COMPANY ANALYSIS 28 January 2015
AVTECH’s Revenue Model
AVTECH’s revenue models will be presented in the following sections.
Primarily, the accumulated benefit model will be investigated. First, a
contract example analysis will be presented along with a brief introduction
of the sales model.
As an introduction, we will give an estimation of how a contract’s revenue
might develop over a finite period:
120,0
120%
100,0
100%
80,0
80%
60,0
60%
40,0
40%
20,0
20%
0,0
0%
1
2
3
4
5
6
7
8
9
10
11
12
Months
Flights per month
Revenue efficiency (%)
*Source Redeye Research
Within a three month
period full capacity of
Aventus systems are
reached
The implementation period is estimated to be around 1-3 months with
subsequent full revenue efficiency starting by the beginning of the third
month. The revenue efficiency or the utilization rate is solely driven by
flights per month which adheres to the actual flights per month divided by
the full practical utilization rate of flights per month and not the theoretical
maximum utilization rate of the contract. The difference between the
theoretical utilization rate of a contract flight relative to the actual practical
utilization rate of flights contributes to the operating efficiency which could
be somewhere between 90 – 100 percent within the later part of the three
month implementation period. Not all flights can use a CDA approach due
to heavy traffic; the operational efficiency will rarely reach 100 percent.
We estimate that the same implementation period can be seen as above if a
direct sale has been made (without an existing Aventus Descent solution
sale). In the case of an already existing CDA solution sale, we believe the
implementation period to be significantly less, as the original connection
and pilot acquaintance of the new input of the FMS is already in place
which would most likely lead to a shorter implementation period.
Company analysis
21
% Rev. Efficiency
Flights per month
Revenue example - Aventus Descent
COMPANY ANALYSIS 28 January 2015
Another factor which affects the implementation period is the complexity
between contracts which might differ substantially depending on the
systems that must be integrated. As such the diagram above should be seen
only as a general guideline of what the implementation speed and revenue
efficiency could be of a typical contract. Therefore, the largest event,
initially, will be the beginning of contract signing, creating a large
discrepancy relative to total amount of flights per month that is practically
possible.
Sales model
The company only performs its sales directly. While direct sales are utilized,
value added resellers (VARs) works as a complement and can lead to future
direct sales. Essentially, VARs can be used for effective advertisement to
reach a wide variety of the possible customers, ultimately channeling these
to direct sales. In the VAR sales model an example is SITA, where the
company markets its product for over 32000 customers. This partnership
ended in YE 2014 as the company wanted to actively take charge of the
customer network themselves. Through direct sales, the company can
deliver higher margins and utilize their other products to sell to their
existing customer rather than to go through a partner with limited
knowledge of its actual products but with better network possibilities. We
derive that the majority of revenues will be acquired from direct sales.
A complement to the sales model is the constant consultancy and R&D
projects in co-operation with industry organizations such as SESAR, which
ensures that the company can market its expertise, knowledge and brand.
Aventus Nowcast - Fundamentals
AVTECH uses the
accumulated benefit model
which correlates well to the
actual fuel savings
In the following section, the Aventus Nowcast revenue model and examples
will be presented. It should be noted that uplink pricing is no longer used
but due to historical and/or future client requests, it is possible that the
mentioned model will be used to some extent. Both models are essentially
variable but with different components that contributes to its variable
nature. AVTECH has now shifted its business to the accumulated benefit
model which correlates more with the actual fuel savings.
The company utilizes two different meteorological feed partnerships,
namely UK Met and Panasonic Avionics. The revenue that AVTECH will
report is before the revenue share agreements to these partnerships, which
is important to note as it will significantly impact the revenue estimates.
We estimate that the partnerships can vary between 25 – 50 percent of a
payout of the total revenue attributable to AVTECH. We define these
partnership payouts as Revenue Share Agreements (RSA). In the longer
term we believe that AVTECH has a formidable position to negotiate lower
rates when the company increases its number of contracts with airline
companies. The primary reason is that its services are used in a larger scale
which in turn can be used to leverage the argument of choosing another
partner instead.
Secondly, as Panasonic enjoys high margins it is possible that the company
could gain from negotiating lower rates due to increased usage of its
products. An offset to this argument is that AVTECH might request realCompany analysis
22
COMPANY ANALYSIS 28 January 2015
time feed, which Panasonic Avionics might supply, which is now updated
up to every 30 minutes as compared with the old feed of 6 hours. However,
this should be seen relative to the actual benefits of shorter interval
updates.
Pay-per-use / Uplink pricing
This section is largely performed to show how the company initially
planned and got paid for its Aventus NowCast sales. The first revenue
model is variable in nature, depending on the pilots’ need to update wind
information. The amount of clicks can be highly variable during a flight
depending on weather circumstances and factors such as the length of
flight. In the following picture the number of uplinks can be observed:
Number of uplinks full flight
*Source Redeye, AVTECH
We can therefore deduce that there are between 2 - 5 uplinks per flight
during a normal length flight. Another variable that affects the total payout
of the uplink is the size of the aircraft. We estimate that the average payout
per uplink is around 3 USD. With 100000 flights per month it would be
equivalent to an annual contribution of approximately 17 MSEK post
revenue share agreements as indicated below. In the table below the
different rates depending on the frequency of uplinks, price per uplink and
amount of flights can be observed. It also shows the potential of Aventus
Cruise but we believe that the company is under significant pressure to
negotiate the price per uplink as more uplinks are registered. This is
primarily due to significantly more intense competitive environment for
flight planning systems and the relative benefits are not as obvious as the
the Aventus Descent.
Company analysis
23
COMPANY ANALYSIS 28 January 2015
Annual revenue example in MSEK (Uplinks per flight)*
Aventus Descent
Price per uplink USD
3
1
17,3
Aventus Cruise
2
34,6
Aventus Cruise Aventus Cruise Aventus Cruise
3
4
5
51,9
69,3
86,6
4
23,1
46,2
69,3
92,4
115,4
5
28,9
57,7
86,6
115,4
144,3
100
17,3
34,6
51,9
69,3
86,6
150
26,0
51,9
77,9
103,9
129,9
200
34,6
69,3
103,9
138,5
173,2
250
43,3
86,6
129,9
173,2
216,5
Flights per month (Thousands)**
*(USD/SEK 7,4 SEK) - Post RSA ( 35 %) -
**Price used 3 dollars - POST RSA (35 %)
Redeye Research
With the revenues comes two primary costs namely the start-up fee and
maintenance fees.
There are start-up fees for the installation of the 4DT installation, as well as
communication and Airport setup fees. Maintenance fees are minimal and
largely non-existent if the company would like to shut down their updates.
Several versions of Aventus Nowcast are regularly updated for a cost of 1-1.5
MSEK per year according to our estimates which adhere directly to these
maintenance fees. We believe this will enhance the value of AVTECH’s
products over time.
Company analysis
24
COMPANY ANALYSIS 28 January 2015
Accumulated benefit model
Estimations of fuel savings
relative to actual can cause
fluctuations of earnings in
the short-term
In this model the accumulated benefit is a product of potential benefits. The
percentage attributable to AVTECH is fixed, but the absolute value differs
due to changes in the estimated benefits. Due to the uncertainty in the
estimated benefit level we have chosen to do a sensitivity analysis
accompanied with different KG outputs. Annually or semi-annually the
company performs benefit level analysis and possible revision of the benefit
level and pricing. It is essential to remember that although the savings are
averaged during a year, it is not certain that the company is paid out in the
amount resulting in the average savings assumed in KG. The reason is that
because the company might have estimated with the customer that
AVTECH will only get paid for the average 20 KG a flight during a month
but if it actually saves 30 KG the month’s savings might not necessarily be
compensated. However, such a discrepancy from the actual savings will
most likely be revised to more appropriate levels, for example if the
estimate of 30 KG in savings remains stable then it should mean the
company receives its full 3 USD over time and not the lower rate of 2 USD
on a 10 percent share of cost benefit. Thus, if the estimated savings relative
to actual savings are comparatively stable on an average basis, the earnings
should be close to the actual savings achieved. If it is more volatile it can
affect the earnings significantly in a substantially positive or negative way
as the estimate might lag in relation to the actual fuel savings achieved.
The same start-up and maintenance fees apply for this model. The model is
clearly relative to the KG actually saved, as shown in the table below.
Savings between 25 – 35 KG generate Pre-RSA revenues of approximately
20 – 28 MSEK for a 10 percent share of airlines cost benefit. The charge is
fixed but unknown, thus leaving us with hypothetical levels of benefit levels.
More savings accompanied with improved negotiation leverage should lead
to increased benefit levels. This assumes a lower ATF (Aviation Turbine
Fuel) price of approximately 0.9 USD per KG or 2.75 USD per gallon. The
reason why the ATF price will not converge to its list price is because SWA
is in its majority hedge against the ATF price which will be explained in
more detail in the market analysis chapter. The model is clearly dependent
on the ATF price – One USD per KG (a 33 percent increase in ATF price) or
3.07 USD per gallon would be equivalent to 22 – 31 MSEK with the same
underlying assumptions as the previous example (20 – 28 MSEK). The
following example can give an indication of the earnings potential of the
Southwest contract in the descent phase:
Annual Revenue Example SW MSEK 2015E*
Avg. Amount of KG saved in ATF
Share of cost benefit
15
20
10%
11%
12%
13%
12,0
13,2
14,4
15,6
16,0
17,6
19,2
20,8
25
20,0
22,0
24,0
26,0
30
24,0
26,4
28,8
31,2
35
28,0
30,8
33,6
36,4
*Redeye Researc h (USD/SEK 7,4 SEK) - 100000 flights/Month - Pre RSA - Jet Fuel Pric e (ATF) 0,9 USD per KG
Because AVTECH reports its Revenues Pre-RSA, it is important to note the
actual Post-RSA figures (35 percent) as indicated by the table below:
Company analysis
25
2016E
2017E
35
29,4
32,3
35,2
38,2
35
30,8
33,9
37,0
40,1
COMPANY ANALYSIS 28 January 2015
Annual Revenue Example SW MSEK 2015E*
Avg. Amount of KG saved in ATF
Payout partners (10 % level)
15
20
30%
35%
40%
45%
8,4
7,8
7,2
6,6
11,2
10,4
9,6
8,8
2016E
25
14,0
13,0
12,0
11,0
30
16,8
15,6
14,4
13,2
35
19,6
18,2
16,8
15,4
*Redeye Researc h (USD/SEK 7,4 SEK) - Post RSA (30 - 45 %) - ATF 0,9 USD per KG
The above figures are all based on 100000 flights per month, which
symbolizes the AVTECH contract of SWA, without the additional contracts
including Air Malta, Etihad etc.
Depending on the type of
plane and meteorological
conditions the fuel savings
achieved could materially
differ
As can be observed the share of cost benefit is important for the revenue
reported. It should be noted that the average KG saved might be
significantly higher than these estimates. Narrow body planes can save
between 10 – 90 KG and larger cruisers can save up to 90 KG. This is also
dependent on the meteorological conditions. So it is reasonable to suggest
that the revenues Post-RSA would be initially, approximately between 15 20 KG for Southwest. For example, Etihad, which operates larger cruisers,
these are likely to have higher fuel savings than a small airplane fleet as
SWA, but is partially compensated by the large flight origination rate from
the stable meteorological conditions in Abu Dhabi.
Consultancy Revenues
Up until now, for the last 25 years, revenues of AVTECH have been mainly
attributable to consultancy work and research grants which we expect will
significantly decrease in relation to total revenue in the coming years.
However, if the company finds opportunities, consultancy work could
become increasingly important with the company’s increased attention to
Wake Vortex and the potential of such becoming required for airports to
fulfill regulatory and efficiency needs. These investments are likely due to
increased profitability along with a strong balance sheet. Due to its limited
current staff and high competence factor this scenario is unlikely. Thus we
deem it unlikely that the company would be able to scale this business as
much as its recurring license business.
Furthermore, the European Commission through the organization SESAR
generates R&D revenues for the company due to their “Direct Associated
Partners” association. We expect these to continue as AVTECH possess
great knowledge of future systems across the full flight segment. A project
financed by the European Commission is the ALICIA project where
AVTECH develops the next generation cockpits for larger helicopter
companies. The payout is based upon approximately 50-75 percent of the
consultancy hours and an incremental percentage in overhead costs. The
results that are developed in these projects can be fully integrated and used
for commercial purposes.
Conclusion
The revenue model applied
is affected by several
parameters
Redeye deems that the accumulated benefit model is, from an economic
perspective more effective for both interests, measuring the exact amount of
benefits rather than the uplink pricing which resembles a fixed payout
model with little correlation to the actual savings. AVTECH also estimates
that it will solely sell its solutions by the accumulated benefit model in the
future. The accumulated benefit model components of fuel savings achieved
Company analysis
26
35
20,6
19,1
17,6
16,2
2017E
35
21,6
20,0
18,5
17,0
COMPANY ANALYSIS 28 January 2015
over time, benefit level, exchange rate and jet fuel price will have significant
impact on the revenues reported.
Company analysis
27
COMPANY ANALYSIS 28 January 2015
Market Analysis
In this chapter the demand for AVTECH’s primary products will be
discussed and analyzed from a regulatory, growth and competitive
standpoint. Then prospective clients, current clients’ future and the oil price
effect on AVTECH’s earnings will be presented and discussed.
AVTECH’s market – General regulatory drivers
Regulatory institutions
supports significant
change in the airlines
industry the coming years
During the last few years there has been significant demand for aircraft
efficiency and time-saving solution by both governmental authorities and
flight supervision bodies. The demand is created of the current systems
inefficiencies which are often and gradually worsened by increasing number
of flights and emissions creating substantial demand for high-tech problem
solving software.
Basically, human controlled systems cannot fully take into account the
multitude of factors like the most important by far - wind - in order to
achieve performance and time based operations in a growing air traffic
industry. Another important factor is that time based operations must be a
co-operation across industry airlines to work efficiently. Considering the
trend of less conservative views of many airlines, along with an older fleet
and increased regulatory pressure to increase efficiency and environmental
thinking Avtech is positioned for growth.
In general the European commission has set out a few general targets for
improving the aviation industry until 2020:
- Time based operations - Tripled air traffic capacity
AVTECH solutions are a
part of fulfilling European
Commision goals until
2020
- Halved costs for Air Traffic Management (ATM)
- Decrease Air traffic management (ATM) related emissions by 10 percent
To decrease ATM related emissions and to utilize more time-based
operations, products such as AVTECH’s, becomes essential. The European
Commission introduced its program already in 2004, which resulted in the
creation of the technological division Single European Sky Air Traffic
Management Research (SESAR) which involves creating an ATM-system
that can handle more traffic and be more efficient in terms of cost. AVTECH
has been involved since the beginning in 2004. 2.1 billion euro will be
invested to ensure that development projects are done. Then from 2016 the
deployment program will start which consists of approximately 3 billion
euro to secure the possibility of efficient time-based operations.
Modernization of equipment between flight control centers and aircrafts
will ensure that datalink communication is processed in real-time and in
turn can handle 4D projects such as AVTECH’s Descent solution, safety
systems and in the end support better time-based operations.
Efficient whole flight
operations priority of
regulatory institutions
CDA is one effective tool among many to enhance fuel efficiency and
aviation safety. The general guidelines from the NextGen program, the US
Congress, EuroControl and other flight authorities are pushing for
evaluation to enhance efficiency during the whole flight both by
Company analysis
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COMPANY ANALYSIS 28 January 2015
performance and on a time based approach. Implementing AVTECH’s
package would decrease the delays in air traffic, fuel consumption and
increase throughput of airport slots.
In essence, The European ATM (Air Traffic Management) master plan
driven by SESAR (European Single Sky ATM Research) involves successive
transition of airline companies to time-based and performance based
operations. London Heathrow will be the leader initially in the technology
transition and AVTECH is currently involved in performing ACM (Air
control management) operations on site including its Aventus software.
NextGen program likely to
drive demand for
AVTECH’s products in NA
In North America, the US Congress has driven several initiatives to increase
flight safety and airplane efficiency involving NASA, to directly spearhead
the FAA implementation of these systems. The program is widely known as
the NextGen program which is similar to the European Commission in
seeking to increase airspace efficiency and environmental focus. These
incentives should lead to more advanced flight efficiency systems. Along
with these goals, accurate real time weather data is also prioritized, which
can lead to faster development of wind feed data which in the long run
could increase margins for AVTECH. However, it could also significantly
impair the future long-term competitive power of AVTECH.
Introduction – Pro regulatory environment for CDA
In the following text we will focus on the circumstances that have created
substantial demand for optimized CDA products similar to the Avtenus
Descent solution.
Regulatory pressure for CDA
In April 2008 the Aviation & Environment Summit in Geneva proposed and
agreed upon the “Aviation Industry Commitment to Action on Climate
Change”. This set the path for a number of initiatives directly linked to
CDA.
Both Eurocontrol which is the European flight administration center and
the US FAA (Federal Aviation Administration) through the governmental
research organization NASA are directing significant resources to optimize
and make flights more environmentally friendly. This is a consequence of
the summit and different governmental initiatives such as the European
ATM master plan and the US Congress initiatives.
In September 2008 European flight supervision authorities CANSO, IATA
and EUROCONTROL signed the flight efficiency plan to enhance the CDA
performance and other incentives to increase fuel efficiency. In 2009 the
European Joint Industry CDA action plan was officially announced and
aimed to deploy CDA in a rapid manner in European Airports and flight
companies.
FAA’s mission supported
by NASA’s EDA solution
but still inefficient relative
to AVTECH’s solution
Since 2010 NASA has been engaged with FAA mid-term priorities of
efficient and environmentally friendly flights. In 2011 the US Congress
requested that NASA conducted more aviation safety and airspace efficiency
research. In 2012 NASA published a study of its EDA (Efficient descent
Company analysis
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COMPANY ANALYSIS 28 January 2015
advisor) software system which indicated significantly enhanced fuel
savings for all airplane models.
The development of NASA’s
product will likely act as
an advertisement for
AVTECH’s datalink
communication solution
However, the design of this product will be inefficient through a voice
communication basis rather than data-link communication to the FMS.
NASA has however stated they have a clear intention of developing a
datalink communication solution as well, beyond the release of the voicebased communication solution. Accordingly, NASA would hand over the
EDA technology to FAA and support the NextGen (Next Generation Air
Transportation system) system implementation the coming years.
Ultimately, this effort from NASA is good advertisement for Avtech’s
products in the short term and would likely become a serious competitor in
the future but with AVTECH having a significantly stronger position.
As described above, multiple regulatory institutions have driven and will
drive the development of optimized CDA systems which poses both a risk
and an opportunity for AVTECH. First, the governmental bodies seems to
have realized a degree of commercial stage concerning its benefits, which
increases the recognition of benefits to all airline companies and
prospective developers and might therefore alter the demand of AVTECH’s
products in the longer term. However, AVTECH’s product for CDA is
superior as of now to all other modern solutions, as the benefits are
substantial versus a non-optimal CDA approach. Despite the position of its
product it’s still relevant to search for the most optimal solutions as the
incremental benefits are still large.
NASA and Eurocontrol currently have their own solutions in place, which
are more instrument based approaches, like initial building blocks, rather
than an optimized data-link commercial solution. As previously noted,
Airforce pilots are already trained using CDA without the optimized systems
of AVTECH but there are also substantial differences in savings between
this approach and the Aventus NowCast system. As AVTECH is industry
leading in its Aventus Nowcast it seems reasonable to suggest that they
would see demand in the coming years for its product portfolio.
Company analysis
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COMPANY ANALYSIS 28 January 2015
AVTECH aligned with significant future industry
aviation growth
As AVTECH is now a global provider of its services through Aventus
NowCast it becomes important to analyze the growth of the industry as a
whole and its drivers across all priority markets US, Europe and Asia.
40-60 airlines operators
with a larger fleet of > 150
aircrafts
There are approximately 2400 airlines of which we estimate there are
around 40-60 airline operators that have large fleets of 150 aircrafts or
more.
The global market for commercial aircrafts is expected to grow from around
approximately 20000 planes in 2013 to approximately 40000 commercial
airplanes in 2030. Already today many airports with heavy traffic can save
large amounts of fuel and optimize flight time from point to point. This is a
consequence of outdated systems being prevailed in airlines. Because of the
intense scrutiny of authorities, as previously presented and discussed, it is
likely that companies such as AVTECH will flourish with an increased fleet
the coming years.
China, India, Africa
growing middle class
should lead to increased
number of flights
In the table below the tremendous growth potential in number of flights can
be observed in the regions of China, India and Africa. When these
economies gradually become more industrialized and with a growing
proportion of middle class (second figure) it should lead to more airports
per inhabitant and increased need for AVTECH’s systems as heavy traffic
becomes standard.
Airports per million inhabitant
*Source: Redeye Research, Airbus
As the world population is expected to increase, as seen in the table below,
especially the proportion of middle class, we would expect more airports for
each million inhabitant in the developed economies too. However, this
should also have another consequence, namely the increased number of
flights and also long-distance flights which AVTECH clearly benefits from.
Company analysis
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COMPANY ANALYSIS 28 January 2015
World population distribution
*Source: Redeye Research, IHS Global Insight, Airbus
Emerging markets likely to
growth significantly faster
– hyper international
airlines important to grasp
for AVTECH
As the table below depicts, there is tremendous growth in annual revenue
passenger kilometers (RPK) in the emerging economies such as China,
India and Africa. The emerging economies will enjoy a CAGR of 6,8 percent,
from 25 percent of the total traffic in 2013, to 38 percent of total traffic in
2033, surpassing the advanced economies flights by 10 percent. Advanced
economies will shrink in relation to total traffic but will increase in absolute
amounts of RPK. This development indicates that AVTECH should
concentrate its efforts on emerging economies and hyper-international
airlines, to take full advantage of the expected growth along with the
increased full savings.
Growth per Region
*Source ICAO,Sabre, Airbus
We therefore expect AVTECH’s general market potential to be favorable in
order to gain and retain clients in the coming years along with the small
market share that AVTECH currently has for its full flight solution.
When it comes to the expected fleet growth, circa 42 percent (excluding the
retained fleet) will be replaced by 2033. The majority of new aircraft will
adhere to new single-aisle aircrafts such as the 737 and A320 which also
consume less fuel than their bigger counterparts.
Company analysis
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COMPANY ANALYSIS 28 January 2015
Fleet composition in 2033
*Source Boeing
This also essentially means that the planes themselves will become
increasingly effective and as such would push down the fuel savings over
time. At the same time number of flights could compensate this effect to
some extent. However, for an actor like AVTECH with an insignificant
market share that is not of a great concern today, and with significantly
more pressing issues such as the competitive environment.
Market fundamentals that indicate increased utilization of
Aventus products
 Aventus NowCast has barely scratched the surface of airlines and
other possible market participants that would be interested in
AVTECH’s services. Major airlines would be interested in saving
millions of dollars in fuel, increase their time-based operations
presence and improving their environmental standing, aligned with
industry interests.
NASA still in development
phase for its voicelink until
2018
Increased air traffic means a
definite need for more
advanced systems to handle it
effectively

Regulatory pressure makes sure that airlines are compliant and
seek to improve the effectiveness their operations, although these
actions take significant amounts of time to implement, key
initiatives are already set in motion from Eurocontrol as well as the
US Congress through NASA and FAA paving the way for AVTECH’s
systems.

Despite Eurocontrol, the EU commission and the joint co-operation
of NASA and FAA the solutions are not expected to come from
these organizations itself or be realized in the near time horizon.
This essentially means that the company would enjoy little
competition in their procurement processes in the coming few
years. NASA’s solution is set for launch in 2016 – 2018 but is voice
based rather than directly linked to FMS and not with the wind
feature included, which is aligned with the NextGen program. The
plan is after the initial voice based CDA approach solution to
release data communications linking which will take more time.

Increased traffic in emirates and Heathrow will put substantial
pressure to materialize time based operations which could seek for
broader implementation of Aventus systems along with the
commercialization of Wake Vortex.
Company analysis
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COMPANY ANALYSIS 28 January 2015
Analysis of the Competition
The level of competition for the primary products differs. For Aventus
Descent the company has established a lead with its wind optimization
algorithm, whereas the Aventus Cruise solution is subject to competition,
due to its fragmented nature and significantly larger savings potential,
which will be of a greater priority from a competitor’s revenue perspective
compared to niche solutions.
Early commercial viability
stage, other concentrations,
inefficent instrument based
approaches will likely lead to
momentum for AVTECH’s
products
Work around potential
possible but the potential
competitor has to believe in
the market
In general we can define the larger competitors’ concentration as a focus on
core activities where their revenue streams are substantially larger, rather
than on the minors, as they are still in quite an early phase of the
commercial-viability stage of solutions. Secondly, larger competitors would
prioritize other fuel saving solutions which are of higher revenue volume
nature than the Aventus Descent approach. These would involve whole
flight planning systems, engineering, maintenance and operational control
systems. Thirdly, we do not believe that the instrument based approach or
the NASA solution will pose an immediate threat, as it should be
interpreted as a potential catalyst for increased attention of state of the art
solutions like Aventus NowCast Descent, which delivers optimal savings
regardless of skill level.
Aventus NowCast Descent
The company currently enjoys limited competition with their patented wind
optimization algorithm, with Boeing being the closest competitor in
procurement processes. We expect that a sophisticated developer with the
right connections and infrastructure, most likely a flight planning system
developer can develop a similar solution within 6-12 months. The patent
itself will not defend them from competition because there is work-around
potential. The process of settling in court is unnecessary at this stage as it
will most likely require considerable time and financial resources.
The market is largely undeveloped due to the fact that whole flight
efficiency systems save substantially more than by focusing on CDA, giving
Aventus Descent sufficient time to establish its position as market leader.
Other solutions are instrument based approaches, which the US Air Force
among many is already performing, which leads to fuel savings if done
correctly, but is less reliable in its nature as it relies on the pilot skills rather
than on an optimized solution. The differences between Aventus Descent
and this approach along with Boeing’s is still substantial and should lead to
greater demand for Aventus Descent in the longer term, as the optimized
algorithm, real-time wind feed data and detailed measurement reduces the
pilot dependency and improves efficiency. Ongoing development processes
like that of NASA’s project Efficient Descent Advisor (EDA) which is
targeted to come into effect by 2016 by voice-link only, and then targeted
for datalink communication later beyond 2016-2018, which at that point
can become a substantial commercial competitor. Not surprisingly NASA’s
effort for this solution is not exactly prioritized as there are other immediate
solutions like that of efficient flight planning systems.
Company analysis
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COMPANY ANALYSIS 28 January 2015
Thus, AVTECH receives significant headwind in terms of time when
developing its market share in this niche.
Aventus Cruise
Several companies within flight planning cross into AVTECH’s core
business, but not all of these flight planning system providers are directly
competing with the AVTECH Aventus system. As previously mentioned,
most flight planning providers have flight planning services pre-takeoff
where AVTECHs solutions are post-takeoff until landing. Most of the mix of
companies mentioned below do not a have a wind based data-link
communication technology as that of AVTECH. However, the interest to
compete with Aventus systems is there as it is directly complementary with
their core business. The following are competitors, indirectly or directly:
SITA, Lufthansa Systems, Sabre Airline Solutions, flugwerkzeuge (Sabre
holdings), AirData, Air Partner PLC, Air Support PPS, Air Routing
International, ARINC, Electronic Data Systems – EDS, FlightAware,
Fltplan.com, Jeppesen,NAVTECH Inc. (NFP), Portable Flight Planning
Software (Military), TopoFlight and Universal weather. Sabre is the current
flight planning system provider for Southwest and United airlines.
Some of these flight planning providers have or are developing more
advanced FMS wind-uplink systems such as LIDO and SITA, saving up to
1800 KG per flight.
SITA’s solution is above par
but still not enough to bind
any innovative and major
airlines.
A Measurable and dynamic
solution to altitude makes
AVTECH’s solution unique
SITA probably being the most likely advanced of the above, which has a
data-link communication solution for up-linking wind feed data to the FMS.
SITA has signed and have operational contracts with Air China and
Malaysian Airlines.
It is not yet proven that AVTECH has a superior solution to SITA’s FMS
wind-solution or any other for the matter, despite this, we are in the
opinion of that full flight solution might be better judged on the basis of the
contracts achieved. With some of the most advanced and demanding
Airlines in the world such as Etihad and SWA, it seems unreasonable to
suggest that its solutions are below the quality demanded, and therefore of
the competitors. Most other competitors mentioned above do not have the
unique algorithm and/or the data feed necessary to execute effective
operations. The wind optimization module AVTECH uses is more dynamic
in terms of altitude differences and fuel savings can be fully tracked on
individual flights which SITA might lack. The latter feature makes AVTECH
clearly interesting as the airlines can present its emission work on a detailed
flight and state level and which most competitors cannot present accurately.
Thus, if you can’t measure it appropriately it becomes significantly harder
to get paid for the work of the software solution which we deem competitors
are struggling with.
Redeye asses that the wind optimization technology is therefore confronted
with intense competition and will most likely intensify in the future and
that the Panasonic wind feed or UK met will not be exclusive to AVTECH.
Redeye also assesses that the company would successfully achieve full flight
sales through an initial sale of Aventus Descent, more effectively than by
Company analysis
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COMPANY ANALYSIS 28 January 2015
assuming full flight sales directly, as it would start a process of change that
might take significant time with a already existing provider.
Prospective customers for its products
In general, any commercial aircraft and low-cost carrier would be interested
in AVTECH’s products which results provide the customer with a broad set
of private, listed and government companies. Larger military organizations
and cargo airlines would also likely be interested in the possible savings.
The markets of interest for AVTECH are Europe, North America and Asia.
We specify the following categories by likelihood and importance:
Commercial standard airlines or legacy carriers, low-cost carriers, Cargo
airlines and Military.
The first category, commercial airlines/legacy carriers, can consist of both
premium and low-cost aircrafts.
Largest commercial airlines by fleet (B USD)
Rank
Airline
Fleet
1
American Airlines
971
2
Delta Air Lines
765
3
United Airlines
703
4
Southwest Airlines
676
5
China Southern Airlines
578
6
Air China
552
7
China Eastern Airlines
492
8
Lufthansa
433
9
Air Canada
363
10
Air France
350
2013 Revenue
39.9
38.3
37.7
34
25.8
24.7
17.7
16
15.9
14.9
2013 Net profit
0.4
0.6
10.5
-2.4
-1.9
0.2
0.8
0.2
0.3
-0.3
*Redeye Research
The potential of revenue streams for the respective fleets can be
standardized and estimated on a relatively conservative basis by the below
figures:
Largest commercial airlines by fleet - Revenues in MSEK
Rank
1
2
3
4
5
6
7
8
9
10
Airline
American Airlines
Delta Air Lines
United Airlines
Southwest Airlines
China Southern Airlines
Air China
China Eastern Airlines
Lufthansa
Air Canada
Air France
Fleet
971
765
703
676
578
552
492
433
363
350
Descent Revenue. Potential*
19
15
14
13
11
11
10
9
7
7
Cruise Revenue. Potential**
26
20
19
18
15
15
13
11
10
9
Ascent Revenue Potential
1,4
1,1
1,0
1,0
0,9
0,8
0,7
0,6
0,5
0,5
*Post RSA Descent - 5x Fleet flights per day - RSA 45 % - 20 KG Savings - 0,9 USD PER KG in ATF - 10 percent cost benefit level
**Equivalent assumptions as above except the assumption of 200 KG savings savings per flight accompanied with a 2 percent cost benefit level
*Redeye Research
For Descent alone
implementing half of the
prospective customer within
this segment would mean
earnings up to 60-80 MSEK
This signifies that the potential revenue streams, if half of the largest
airlines implemented its solutions, would be approximately 60– 80 MSEK
in earnings from Descent alone and Cruise even more as the table above
indicates. Most likely larger savings could be achieved, depending on the
fleet versus flights ratio, length of flights and conservative estimates on the
KG savings.
Furthermore, the bankruptcy risk is negligible for these airlines because of
their sheer size, and if it would become the case, we would expect
consolidation thus preventing a contract loss. The above example reflects a
lower RSA than we really expect because we see that the company can
progressively have more leverage in negotiations due to the fact that they
can both set a more attractive price due to observations of tests between the
two providers and when the number of clients increase, the costs associated
Company analysis
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COMPANY ANALYSIS 28 January 2015
with the meteorology providers for each additional customer is only
incremental.
Low-cost carriers likely to
implement to cost-efficient
solutions of AVTECH
Low cost carriers
In addition to the commercial there are several airlines that are more
focused on looking over every cost-item in order to secure a competitive
offer for the customer. We estimate that there are approximately 10-20 lowcost operators that would be interested in the AVTECH product. It would
seem likely that 3 or more of these market participants would become
customer during 2015:
Low-cost carriers by fleet - Revenues in MSEK
Rank
1
2
3
4
5
6
7
8
9
10
Airline
Jetblue
Easyjet
Air Berlin
Norwegian Air
Vueling
German Wings
Jet 2
Wizz air
Condor
Thomas cook
Fleet
203
202
169
102
90
80
54
51
42
31
Descent Revenue. Potential*
4
4
3
2
2
2
1
1
1
1
Cruise Revenue. Potential**
5
5
4
3
2
2
1
1
1
1
Ascent Revenue Potential
0,3
0,3
0,3
0,2
0,1
0,1
0,1
0,1
0,1
0,0
*Post RSA Descent - 5x Fleet flights per day - RSA 45 % - 20 KG Savings - 0,9 USD PER KG in ATF - 10 percent cost benefit level
**Equivalent assumptions as above except the assumption of 200 KG savings savings per flight accompanied with a 2 percent cost benefit level
*Redeye Research
As most of these are European airlines we expect that the RSA rate might be
lower which could increase the operating margin substantially. Some of
these might have problems surviving in the low-cost climate and might be
consolidated, but as we see it, it would still mean that they would keep the
AVTECH system to maintain its competitive position.
It is worth mentioning that Ryanair is one of the airlines we decided to
exclude despite that it has a substantial fleet size. The reason is that the
Ryanair fleet consists of old planes, which often do not support Aventus
software solutions at all. Progressively, we think that Ryanair will be forced
to comply with regulatory demands by 2019 from a time and performance
based perspective. In 2019 its fleet is estimated to be around 500 aircrafts.
In that scenario there will be a cost/benefit analysis and will most likely
lead to a costly implementation in order to remain in business. It is
therefore possible that AVTECH or an equivalent in a distant future will
have Ryanair as customers as well.
Cargo
Cargo airlines often carry more weight which induces a larger need for
techniques such as Aventus descent. However, we only see potential value
for the first three actors in the table below.
Company analysis
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COMPANY ANALYSIS 28 January 2015
Largest cargo airlines by fleet - Revenues in MSEK
Rank
1
2
3
4
5
6
7
8
9
10
Airline
FedEx Express
DHL
UPS Airlines
TNT Airways
Korean Air Cargo
China Postal Airlines
Cathay Pacific Cargo
China Airlines Cargo
Cargolux
Lufthansa Cargo
Fleet
643,0
250,0
237,0
37,0
27,0
22,0
22,0
21,0
20,0
20,0
Descent Revenue. Potential*
19
7
7
1
1
1
1
1
1
1
Cruise Revenue. Potential**
25
10
9
1
1
1
1
1
1
1
Ascent Revenue Potential
1,4
0,6
0,5
0,1
0,1
0,0
0,0
0,0
0,0
0,0
*Post RSA Descent - 5x Fleet flights per day - RSA 45 % - 20 KG Savings - 0,9 USD PER KG in ATF - 10 percent cost benefit level
**Equivalent assumptions as above except the assumption of 300 KG savings savings per flight accompanied with a 2 percent cost benefit level
*Redeye Research
Significant barriers of entry
for the military segment
Low-cost carriers likely to
implement AVTECH’s
solutions on a broader scale
initially
Fuel savings important for
companies considering its
large share of operating
expenses
Military
This segment is less likely to gain ground in the near term horizon due to
prolonged governmental processes. In short, only the Hercules cargo fleet
of the US air force consists of approximately 400 aircrafts. The potential in
this segment is very large, but far too unrealistic to give any revenue
forecasts on today, due to AVTECH’s primary focus on commercial
airplanes as well as the long procurement processes and strict
requirements.
Summary: Potential in market segments
In general we deem that the legacy carriers and low cost carriers along with
the cargo fleet are the closest customers. However, due to low cost carriers
being more interested in all measures that can improve its cost-position we
deem that the near-term of 1-2 years will mainly consist of low-cost carrier
contracts of various sizes. The likelihood for these contracts is relatively
large considering the established customer reference and the increase of
these customers moving down their fuel-savings chain. There are currently
approximately 2400 airlines and thus it is reasonable to assume that the
company still has a lot of potential within all categories of size with its
currently outstanding Descent and full flight products.
Because the major airlines have already exploited many of the techniques
that can be used to minimize fuel consumption, techniques such as CDA
should become more preferred. Fuel consumption itself relate to on average
30 percent of SWA’s operating expenses.
The US alone has a large military cargo fleet but the processes for a contract
is often long, constricted by strict security and general requirements, which
AVTECH is not compliant with today, at least from an organizational and
system perspective.
Airlines would often consider more pressing and immediate cost savings
that include but not limited to maintenance cost, fees paid to
government/airports, fees to travel agents and fuel hedging.
Although the fuel savings can be achieved through flight operation systems
the companies generally need to resolve the most pressing issues first as
well as to gain an understanding of the benefits. This problem is self-solving
in terms of increased attention by Eurocontrol and the NextGen program,
and with increased attention to pilot organizations the procurement
processes could become significantly decreased.
Company analysis
38
COMPANY ANALYSIS 28 January 2015
Current customers evaluation
This section will focus on the two customers of today. It is imperative that
current contracts companies are analyzed, especially Southwest Airlines.
Fleet composition and future dynamics of its fleet and routes will then be
presented.
Southwest - contract implications and future
The Southwest Airlines development is especially paramount for the
perceived stability of AVTECH in the near term. The company has a binding
contract of five years.
SWA contract has 24 percent
of the total US market
Southwest currently has 24 percent of the total US market. Southwest is
also number one in 53 of its 93 airports currently in coverage. In US the
company is a market leader in 32 of the top 60 metro areas. Delta,
American and Alaska airlines are other airlines which are significant market
leaders in the US metro Areas, which we believe will become customers
within the next 2-3 years. To provide the best wind feed data, the choice of
wind feed provider was natural – Panasonic.
Southwest representation of markets
*Southwest
It is no surprise that AVTECH’s wind feed comes from Panasonic Avionics
as its focus is on N&S America and as such we think even though the RSA is
high; it is clearly beneficial to have the strongest operator in the country in
order to maximize the cost savings. Although, it is certainly possible that
margins expand when more airlines are attained and/or more options of
meteorology providers.
Southwest fleet consist mainly
of Boeing 737’s, growth in fleet
expected in the future
Approximately 90 percent of Southwest’s fleet at the end of 2013 consists of
Boeing 737’s, which represent fuel savings of approximately 15-50 KG. This
is highly dependent on the meteorological variations between US cities. By
end of 2014 the fleet is expected to only consist of 737’s which will most
likely increase the fuel saving, even though, they will be replaced by modern
Company analysis
39
COMPANY ANALYSIS 28 January 2015
aircraft. In analyzing the Southwest Annual report, it is suggested that its
fleet will increase by approximately 5 percent in 2015, if all order options
are utilized. The company is well financed with a credit line of
approximately 1 billion and 4 billion in Cash and Cash equivalents. The high
profitability accompanied with substantial Cash and Cash equivalents is
quite rare in the airlines industry, which might be explained with the
unique innovative culture of Southwest with a subsequent transition to lowcost carrier thinking. We believe more legacy carriers will mimic the detail
efficiency measures implemented by Southwest. As will be explained later
in the Oil Price Analysis chapter, Southwest current and future spot market
exposure is small relative to the Oil price which makes AVTECH relatively
impervious to oil price volatility.
Besides fuel savings, the company must increase timeliness of its
operations, in July 2014 Southwest Airlines had 50 percent of its flights
delayed according to United States Department of Transportation (DOT).
Apart from fees paid to airports, these delays invoke larger fuel
consumption which could be significantly reduced if a TBO based air traffic
system is invoked. As stated previously, the responsibility to increase the
presence must happen on a wide scale to work efficiently.
SWA likely to implement an
efficient Cruise system after
successful implementation of
Descent
Potential in Selling Aventus Cruise to SouthWest
By implementing the Aventus cruise, the potential savings are higher but
the competition is also much higher. The fuel savings could be between 200
– 1000 kg per flight if implemented correctly. SWA hedged around 40
percent of its fuel between 2015 and 2016 (vs 20 percent in 2014), despite
these efforts we retain that the volatility will be high in the coming years.
The most important factor is how Southwest will interpret the quality of the
Descent product, and whether it might want to use the same system for
effectiveness and simplicity reasons. Due to Southwest not having an
advanced and measurable full flight phase optimization system, it is likely
that the company would utilize the Aventus Cruise product. As previously
noted, implementing the Ascent solution for SWA would not be a
breakthrough for the company in terms of revenues.
Company analysis
40
COMPANY ANALYSIS 28 January 2015
Etihad Airways Revenue potential
Substantial expansion of its
fleet with larger aircrafts in
the future
The potential savings for AVTECH’s contract with Etihad is based on the
assumption that the company has a fleet of approximately 105 aircraft,
which primarily relate to the larger Airbus A family. Etihad is an expanding
airline operator, well-financed, and positioned for growth even as a
relatively small player as of today. Our estimate for 2015 is that the
company will increase its capacity to approximately 7500 flights a month
(2013: 6243 flights) which is due to the increased fleet along with more
destinations. This can be seen in the table below where the fleet in 2025 is
still expected to be in the sort of the larger Airbus A series.
Ethiad composition of current/future fleet
*Redeye Research, Etihad Airways
It is possible that the fuel savings should be significantly higher with the
Etihad larger airplanes. Initially one might believe that as approximately 50
percent of the Abu Dhabi desert has a relatively low atmospheric pressure,
and therefore there would be less intense winds, but in reality intense
inversion winds are largely present in the Arabian Gulf and thus it is
evident that the savings might be substantially higher than our lower
estimate of 30 KG. Based on this analysis we expect that the contribution
from Etihad Airways from 2015, being in full operation in the beginning of
January, thereby resembling the table below:
Annual Revenue example MSEK (Etihad Airways) POST RSA 2015E*
Avg. Amount of KG saved in ATF
Payout partners (10 % level)
30
35
45
50
60
30%
1,3
1,5
1,9
2,3
2,5
35%
1,2
1,4
1,8
2,1
2,3
40%
1,1
1,3
1,6
2,0
2,2
45%
1,0
1,2
1,5
1,8
2,0
*Redeye Research (USD/SEK 7,4 SEK) - Post RSA (30 - 45 %) - ATF 0,9 USD per KG - 7500 flights per month
While far less than the SWA contract, the potential revenue streams are not
insignificant in the longer term. A factor that might offset the expected
increase is the oil price, depending on whether if it is maintained at the
current price of 2.3 USD per gallon or approximately 0,75 USD per KG (16Company analysis
41
COMPANY ANALYSIS 28 January 2015
17 percent difference from the assumed price of 0,9 USD per KG). This is
due to the relative low hedge level for Etihad between 33,1 percent and 7,7
percent for 2015 and 2016 respectively.
Etihad contract could spiral
into several other contracts
which Etihad has ownership
in JetAirways, Airtalia and
Air Berlin of example.
Etihad is certainly more interesting than its above earnings, namely the
recent acquisition in August 2014 of a 49 percent stake in Airtalia (119
aircrafts) should lead to another Descent deal in 2015 after the tests with
Etihad. This should lead to more or at least the equivalent earnings of
Etihad alone. Accompanied with this recent deal, other ownership stakes
are JetAirways, Air Berlin, Livingstone Switzerland and a small stake in Air
Lingus. Air Berlin is one of the above listed top five customers adding
approximately 7 million SEK during 2015 for Aventus Cruise and Descent.
Oil Price – Is it really an issue of major long-term
significance?
Oil price affecting earnings
significantly fpr AVTECH
The Jet fuel price by the end of November was approximately is 2.3 US
dollar per gallon which is equivalent to approximately 0.75 USD per KG.
Due to previous hedging we expect this number to be higher than the above
figure. The fuel price is of course a key factor in calculating the benefits;
decreasing the average KG price from 0.9 to 0.5 USD will have an effect of
approximately 45 percent on AVTECH’s earnings. However, the current
hedge enables the company to be agile even in a high oil price environment.
A statement of the last 10 years can be observed in the table below:
Historical Oil Prices Southwest
*Southwest
As the oil price has increased substantially in the last few years the
operating expenses have subsequently increased significantly which
symbolizes the volatility that can arise in SWAs operating expenses and
ultimately affect AVTECH’s earnings. Approximately 62 percent of SWA’s
ATF price was hedged during 2014 and thus will not be as positively
affected by the price decline, which does not benefit AVTECH. For 2015 –
2016 the exposure on the spot-market has been downward adjusted
significantly. Around 90 % of the 2015-2016 exposure is hedged, which we
expect would peg the price at approximately 2,6 – 2,8 USD per gallon. The
reasoning behind SWA’s hedging is most likely due to the taking advantage
of a possible rebound in oil price.
Company analysis
42
COMPANY ANALYSIS 28 January 2015
The lower oil prices will most likely lead to a short-term negative effect on
AVTECH’s earnings and the magnitude depends on the contracts exposure
to the spot-market of ATF and the revenue mix of AVTECH. In the longer
term we would expect that a permanent lower oil price would also set off
increased number of flights and expansion of airlines in combination with
the population growth and emerging economies growth. Lower oil prices
might also increase the competition, in the longer term, as it decreases the
cost base and thus make the returns more attractive for airlines, which is
also good for Avtech.
Conversely if oil prices would be higher from these levels an increased
amount of flights is expected due to population growth accompanied with
emerging economies which will mean a win-win to AVTECH.
Oil prices independency of air
traffic growth will most likely
compensate for the negative
impact of falling oil prices
The reasoning behind that commercial air traffic growth is largely
independent of oil prices in the longer term can also be observed in reality:
Airlines Resilience in Financial Crisis
*Redeye research, Boeing
Thus, even if oil is at record low or high level, the commercial traffic will
still increase. We should also note that AVTECH is barely established within
the majors which will make AVTECH aligned for superior growth potential,
relative to the commercial air traffic growth.
Company analysis
43
COMPANY ANALYSIS 28 January 2015
Estimates
Introduction
The following paragraphs represent our reasoning on the future earnings
power and assumptions that follow.
Southwest Airlines – Larger airlines
The Southwest will play a pivotal role for the revenue and earnings
magnitude in the future, but will gradually decrease in importance as the
company gains expected traction in its procurement processes.
We assume approximately 90 percent operational efficiency for our revenue
estimates Pre-RSA with Southwest. Average flights for Southwest have been
approximately 330000 per quarter during the last year. The operational
efficiency estimate of approximately 90 percent is based on that all flights
will not use CDA and/or cannot use CDA for all flight routes or
circumstances. We expect that the operational efficiency will improve due
to routine analysis and reviews for and from the airline operator along with
the expansion of the Southwest Fleet.
In the table below, Pre-RSA, which AVTECH defines as their revenues, will
most likely be a product of the Southwest contract during 2015:
SW Revenues Descent MSEK 2015E*
2016E
2017E
20
Avg. Amount of KG saved in ATF
Share of cost benefit
15
20
25
30
35
20
5%
6,0
8,0
10,0
12,0
14,0
8,4
8,8
10%
12,0
16,0
20,0
24,0
28,0
16,8
17,6
12%
14,4
19,2
24,0
28,8
33,6
20,1
21,1
13%
15,6
20,8
26,0
31,2
36,4
21,8
22,9
*Redeye Research (USD/SEK 7,4 SEK) - 100000 flights/M onth - Pre RSA - Jet Fuel Price (ATF) 0,9 USD per KG
Post – RSA which as previously explained is the earnings that the company
receives after partnership payouts can be seen below:
SW Revenues Descent MSEK 2015E*
2016E
2017E
Avg. Amount of KG saved in ATF
Payout partners (5 % level)
15
20
25
30
35
20
20
30%
4,2
5,6
7,0
8,4
9,8
5,9
6,2
35%
3,9
5,2
6,5
7,8
9,1
5,5
5,7
40%
3,6
4,8
6,0
7,2
8,4
5,0
5,3
45%
3,3
4,4
5,5
6,6
7,7
4,6
4,8
*Redeye Research (USD/SEK 7,4 SEK) - Post RSA (30 - 45 %) - ATF 0,9 USD per KG
Earnings from SWA Descent
alone could be in the range of
4 to 10 MSEK with potential
upside
We believe that the payout due to the level of sophistication and market
position of its partner, Panasonic, will make AVTECH earnings to be in the
interval of approximately 4 to 10 MSEK for a typical year for the Southwest
contract (5 percent benefit level). For 2015 we count approximately 8 MSEK
contribution or approximately 4 MSEK in Post-RSA earnings at a 5 percent
benefit level.
Most likely the benefit level will be higher because the benefit level is
already at low levels, along with the fact that full fuel savings will not be
fully paid for. The reason for the low benefit level is because of the favorable
position the airlines were in to act as a flagship advertisement for the
AVTECH product.
Company analysis
44
COMPANY ANALYSIS 28 January 2015
For future periods, the assumption is that operational efficiency increases,
fleet increases by 5 percent YOY and annual savings gradually improve as
the contract is negotiated to the fair benefit levels when the benefit levels
are analyzed in more detail.
Expected RSA rate of 40-50
percent for SWA
We expect that the improvements in savings and revenues should become
more evident in the second half of 2015. It is expected that the RSA rate for
SWA could be between 40-50 percent, because of the first major contract,
and the negotiation position of Panasonic due to its state of the art
equipment.
In terms of estimating other major contracts we refer to the market analysis
chapter where we derived the potential revenue streams of major cargo,
commercial and low-cost carriers.
Etihad estimates – Mid/Smaller Commercial Airlines
There is a large amount of smaller operators out there which we believe the
company can capitalize on over time.
Etihad being a smaller
airlines today but with a
growing fleet, ties to other
aircraft carriers along with
extension to the Cruise
segment the contract has
significant potential
Etihad is a small operator in terms of fleet size, but the company operates
larger airplanes and revenues are definitely not negligible, because of two
major reasons: Etihad expects to double its current fleet within the next 10
years along with destination increases and will strive to become more
international. We therefore expect that the company gradually decreases its
current 40 percent origination rate of flights from Abu Dhabi, which from a
meteorological standpoint would lead to higher average KG savings than
the present amount of 30 KG.
Annual Revenue example Descent MSEK (Etihad Airways) 2015E*
Avg. Amount of KG saved in ATF
Share of cost benefit
30
35
10%
11%
12%
13%
1,8
2,0
2,2
2,3
2,1
2,3
2,5
2,7
45
2,7
3,0
3,2
3,5
55
3,3
3,6
4,0
4,3
60
3,6
4,0
4,3
4,7
2016E
2017E
60
3,8
4,2
4,6
5,0
65
4,2
4,6
5,0
5,4
2016E
2017E
60
2,7
2,5
2,3
2,1
65
2,9
2,7
2,5
2,3
*Redeye Research (USD/SEK 7,4 SEK) - Pre RSA - Jet Fuel Price (ATF) 0,9 USD per KG
Annual Revenue example MSEK Descent (Etihad Airways) POST RSA 2015E*
Avg. Amount of KG saved in ATF
Payout partners (10 % level)
30
35
45
30%
35%
40%
45%
1,3
1,2
1,1
1,0
1,5
1,4
1,3
1,2
1,9
1,8
1,6
1,5
50
2,3
2,1
2,0
1,8
60
2,5
2,3
2,2
2,0
*Redeye Research (USD/SEK 7,4 SEK) - Post RSA (30 - 45 %) - ATF 0,9 USD per KG - 7500 flights per month
We expect three of these smaller contracts to be realized, including Etihad
and Airtalia which could look similar to the above depending, on the A/C
type. We also expect one midsized contract to materialize during 2015.
Important for the company
and industry to bind SWA as a
Cruise customer to produce
significant earnings boost
Aventus Cruise
If the company is able to sell its Aventus Cruise solution to SWA, which we
deem is more likely than to directly compete with existing flight planning
systems; it will likely have a significant impact on the already established
earnings. It is expected that a contract with Southwest will be announced by
the 2nd quarter but not fully operational until in Q3.
Consider the impact of the fact that SWA does not have any proper flight
Company analysis
45
COMPANY ANALYSIS 28 January 2015
planning systems (fundamentally, the instrument approach has been used
until recent years) and the possibility of standardization of flight planning
systems.
The contract is also dependent on the success of implementation of the
Aventus Descent which has so far worked well.
SW Revenues Cruise MSEK 2015E*
2016E
2017E
200
23
49
97
200
32
35
70
Avg. Amount of KG saved in ATF
Share of cost benefit
200
16
32
64
1%
2%
4%
220
18
35
70
250
20
40
80
300
24
48
96
400
32
64
128
*Redeye Research (USD/SEK 7,4 SEK) - 100000 flights/Month - Pre RSA - Jet Fuel Price (ATF) 0,9 USD per KG
We believe the cost benefit level will be significantly lower. First because it
would be the first whole flight system AVTECH would deploy commercially,
which would pose a question of SWA’s negotiation position. Secondly, it
would be reasonable to suggest that the savings are much larger which
should lead to a lower share of cost benefit.
SW Revenues Cruise MSEK 2015E*
2016E
2017E
200
16
15
14
13
200
22
21
19
18
Avg. Amount of KG saved in ATF
Payout partners (1 % level)
30%
35%
40%
45%
200
11
10
10
9
220
12
11
11
10
250
14
13
12
11
300
17
16
14
13
400
22
21
19
18
*Redeye Research (USD/SEK 7,4 SEK) - Post RSA (30 - 45 %) - ATF 0,9 USD per KG
The above calculations are conservative because they assume that a mere 1
percent of the attributable benefits goes to AVTECH which would add
approximately 9 MSEK of earnings in 2015, assuming a 45 percent RSA rate
and a 1 percent benefit level. The RSA rate is expected to be approximately
forty-five percent due to the same reasons as previously presented for the
Aventus Nowcast Descent product.
However, we believe that the company must first prove itself in this
competitive arena as previously discussed in the product section, to extend
its contracts across a larger customer base, not only with tests, but it must
also be seen in relation to SITA and other solutions.
Ascent revenues
Ascent Revenues largely
insignificant relative to
Descent/Cruise
Providing significant revenue streams from the Ascent in the relative short
term will be extremely difficult because of natural reasons. This is because
the thrust used from the starting point will ensure that it will be
significantly harder to save fuel from this angle even though head/tail wind
is calculated properly. We believe that the revenues to be approximately
1/10 of the Descent revenues.
Company analysis
46
COMPANY ANALYSIS 28 January 2015
Complete Yearly Estimates
Based on the previous discussions and as there are currently 100
procurement processes that the company is actively engaged in, with 10
contracts expected to be materialized within the next two years we estimate
the following order distribution can be derived:
New orders by Size
2012
2013
2014E
2015E
2016E
0
0
2
0
0
0
1
0
0
1
1
3
1
1
2
Fleet Size
Large (300-600)
Medium (150-299)
Small (0-149)
*Redeye Research
In the following table the revenue streams based on the above calculations
and assumptions are presented:
Estimates*
MSEK
Total - Aventus Division
Q4'14E
1,3
2014E
1,3
Q1'15E
1,9
Q2'15E
2,1
Q3'15E
10,1
Q4'15E
12,5
2015E
26,7
2016E
59,9
Rev.Cruise
Rev. Descent
Rev. Ascent
1,3
1,3
1,9
2,1
4,0
5,7
0,4
4,4
7,6
0,6
8,4
17,3
1,0
23,0
34,3
2,6
Revenue (Consultancy - R&D)
Revenue - Other/Activated costs
3,0
0,5
11,3
2,1
3,0
0,5
3,5
0,5
4,0
0,5
4,0
0,5
14,5
2,0
16,0
2,5
Revenue (Total)**
Number of flights Descent (FY - AVG) per month
Number of flights Cruise (FY - AVG) per month
Number of flights Ascent (FY - AVG) per month
Tillväxt
Cost of goods sold
%
External costs
Personel costs
Depreciation
EBIT (Aircraft s division)
%
EBIT (Total)
4,8
14,7
5,4
6,1
14,6
16,4
43,2
78,4
70333
17583
105500
116050
139260
100000
100000
188001
115000
115000
137203
100000
100000
225000
145000
145000
0,6
45%
2,0
1,6
1,0
0,6
45%
7,0
7
4,1
0,9
45%
2,4
2,2
1,0
0,9
45%
3,0
2,4
1,0
4,6
45%
3,5
2,4
1,0
5,6
45%
3,5
2,4
1,0
12,0
45%
12,4
9,4
4,0
26,9
45%
13,6
9,9
4,0
0,7
55%
-0,4
-0,3
-4,4
0,1
4%
-1,0
0,2
7%
-1,2
4,6
80%
3,2
5,9
78%
4,5
10,7
40%
5,4
28,9
48%
23,9
*Avg. 20 KG Savings -(USD/SEK 7,4 SEK) - Post RSA (45 - 50 %) - AT F 0,9 USD per KG
**Revenue includes Activated costs
Source: Redeye Research, Avtech
Significant value-driving
flights are expected to be
approximately 300000 by end
2015
Going forward the revenues
will be significantly
dominated by Aventus
Nowcast
Aventus software division
In relation to the far most important parameter of these estimates, within
the near term of 1-3 years, is the amount of earnings from the Aventus
software division. As previously mentioned we only count with the Ascent
phase for illustration purposes. At the end of 2015 there will be
approximately 400000 flights per month, where 300000 are
significant/key value drivers. We expect that approximately 215000 value
driving flights, or 72 percent, will be derived from the Southwest contract in
YE 2015. In 2016 there will almost be 430000 significant value driving
flights.
In 2015 approximately 60 percent will originate from Aventus NowCast full
flight and approximately 77 percent in 2016, with significant cash-flow to be
expected by 2016 when the effect of the diminishing cost base becomes
more noticeable as a consequence of its scalability.
Differences from company estimates
We think that AVTECH’s 600000 flights per month for 2015 is too
optimistic as it would assume that either the company can win
approximately two 40000 flights contracts with all three flight approaches
over our current estimate.
Company analysis
47
COMPANY ANALYSIS 28 January 2015
Essentially, what matters on an earnings level is revenues originating from
Cruise and Descent. Alternatively, it assumes that the company materializes
over 6 mid/large contracts during 2015 for the Descent approach. We
believe that the company has an edge in the Descent approach but taking on
full flight planning systems might take significant time, considering the
competition in particular and that Southwest is actually a unique case.
Consider that Southwest Airlines does not have a proper competitive
solution for Cruise along with the fact that the company still has to prove
itself, as well as that SWA could expand its product portfolio to full flight
products. Even if the company can surpass the competition in the short
term, the long-term case is more uncertain with many competitors having
large resources and same or better prerequisites to deliver an equivalent
product. From a practical context, problems like that of existing long-term
binding client contracts with flight planning system providers might hinder
the actual sale of AVTECH’s systems. On the contrary, this logic also means
that actors trying to infiltrate AVTECH’s position for the descent approach
might have to wait until the contract expires.
The process with extending the descent approach to Cruise is estimated to
take up to 9 months, if the company is able to provide competitive software
among an abundance of competitors. However, it should be noted that the
implementation period of the commercial phase is approximately 2 months.
Gradual increases of fuel
savings for SWA going
forward
Savings and benefit levels assumptions
The earnings depend on the amount of KG savings which is estimated to be
initially, an average of 15 KG (SWA) and 30 KG for Etihad (the lowest
reasonable approximation of fuel savings according to Redeye for the
narrow-body/wide-body type aircraft respectively). The conservative
estimates initially between Southwest and AVTECH should gradually
improve to 20 KG for SWA during 2015. This is the rate we expect the
Aircraft type used by SWA will save, but where AVTECH will only get paid
for 15 KG until a renegotiation likely by its contract of Cruise by Q3.
Therefore, the difference from the average estimate of KG poses a risk in
these estimates which could boost/evaporate earnings and possibly not be
able to achieve the earnings calculated for the indicated savings of 20 KG
USD but initially paid for 15 KG (which is an approximation of the average
savings in KG of small/mid commercial aircrafts).
We also expect that the company finalizes five contracts in total, which will
bring the number of flight by YE 2015 to 188 thousands flights for the
Descent approach. In the calculation we assume Etihad and SWA coupled
with the orders gained in Q1-Q2, will order the Aventus Cruise system by
Q4. The total amount of Aventus Cruise flights will be approximately
115000 flights per month in YE 2015. Additionally, we think Ascent will
produce similar amount of flights as Cruise. With the strong lineup of
procurement processes, along with the successful track-record finalizations,
it will most likely lead to more procurement processes over time and fulfill
the subsequent revenue increase we account for.
Apart from the above assumptions, the model is also dependent on the RSA
rate, oil price and the exchange rate. In regards to the oil price, the
Company analysis
48
COMPANY ANALYSIS 28 January 2015
particular airline company’s specific hedging to the ATF price will have a
direct effect along with actual volatility of the oil price.
Southwest going from 5
percent benefit level to 10
percent by Q3 2015 for its
Descent product
When the actual results are presented and as the company continuously
delivers results, it should be an indication of the increased KG savings and
accompanied with negotiations of the benefit level should result in the
increase from the 5 percent benefit level to 10 percent in Q3 2015 for
Southwest. We do not think this applies to Etihad as the company most
likely enjoyed significant negative leverage in the initial negotiations with
Southwest as a customer. Going forward, we believe the company is better
set to increase its benefit level substantially for all upcoming contracts in
relation to the Southwest contract.
From Q3 it is estimated that the company will get paid for 20 KG with the
Southwest contract with a 10 percent share of cost benefit level (Previous: 5
percent). This is the fair estimate of potential savings for the Aventus
Nowcast Descent with the future Southwest fleet composition accompanied
with Etihad positive contribution. The second contract, the Etihad contract,
will boost the revenue streams slightly from Q1, with initially 5500 per
month during the expected implementation period and then peaking at
7500 flight per month at 2015 YE.
Redeye estimates that there will be approximately 190000 descent flights to
be derived from the current SWA contract and five other contracts
(including Etihad) during 2015. Cruise and Ascent will stand for the
remainder of flights.
Contract with a legacy
carrier could evaporate
our assumption
A contract the size of SWA would evaporate our 2015 assumption, as other
contracts with low-cost carriers are likely. We believe that these very large
deals with legacy carriers can take considerable time and low-cost carriers
will likely be the carriers which in the shorter-term secure contracts.
Consultancy estimates
After the reconstruction of the organization in 2013 we have seen that
personnel costs have gradually decreased but the revenues from R&D and
consultancy projects have increased. We see this trend to continue as the
company intensifies its actions within Wake vortex and to slightly increase
the personnel to support the development of the Aventus Cruise system
further.
Being a partner with SESAR and with extensive industry experience, the
company could take on more consultancy projects, but we deem that
management realizes and must first concentrate on its core projects in the
coming year before engaging in more disruptive technology projects. As can
be observed in the previous table, the revenue reliance from consultancy /
R&D projects which are barely profitable will be gradually decreased when
Aventus NowCast Descent effect sets in.
Regarding the activated costs which are related to R&D projects, the
revenue and EBIT seems over appreciated at first in the income statement.
An alternative for the company is to report these items directly in the
investing activities of the cash-flow statement. There are several accounting
premises that state the activated costs must be derived from projects that
Company analysis
49
COMPANY ANALYSIS 28 January 2015
are likely to generate income within a reasonable time-frame. The natural
approach to counter these revenues from overstating the income statement
is to increase the depreciation which is currently written-off using a five
year period. Finally, the depreciation itself is larger than the effect of
activated costs which in the end puts a slight downward pressure on the
representation of the EBIT figure. However, we estimate that the company
must invest in software development related to the R&D projects to
maintain its standing in the current competitive environment.
Company analysis
50
COMPANY ANALYSIS 28 January 2015
Valuation
The valuation is based on a Discounted Cash Flow Model (DCF) and a
multiple analysis. Along with these valuation methods different valuation
scenarios are presented to guide the investor.
DCF
YE 2016 circa 600000 flights
– primarily driven by
successfully attaining low-cost
carriers
Revenues from consultancy
segment highly flexible but
likely needed to sustain its
competitive advantage
In the case of AVTECH we estimate that there will be approximately
420000 total flights (full flight envelope) in year-end 2015, with year-end
2016 being approximately 600000, led by a majority of a strong intake of
Aventus Descent customers (primarily driven by successful low-cost carrier
procurement processes). As we believe the process of receiving full flight
systems is more unproven at the moment and is generally more demanding
due to competition, the contracts of Aventus Cruise will most likely lag
behind the growth of the Aventus Descent orders initially.
The reported revenues and margins of AVTECH in the coming years will be
largely flexible for the consultancy revenues components and thus it
becomes difficult to pinpoint the exact costs of the R&D expenditures.
However, these activities are most likely value adding both in gaining
reputation and possibly new products to add or maintain its existing sales
momentum in the longer term. This is likely to be vital when the Aventus
NowCast portfolio is confronted by enhanced competitive challenges from
primarily flight planning providers and regulatory solutions. Thus to a large
extent the additional costs must be accounted for as maintenance
expenditures to retain the competitive position Redeye estimates the
Aventus NowCast division have in the future.
Constraint on margins in the
relative short term.
The largest downside impact on margins will be noticed in the coming three
years when the consultancy revenue projects relative to total revenues are
most significant. The EBIT margin is assumed to be approximately 30-40
percent until 2017 for the Aventus family products, with steadily declining
margins thereafter. As personnel costs are basically pegged at 4 MSEK a
year for the Aventus software division (3-4 techs/2-3 salesmen), the margin
improvement will be more pronounced in future periods, with the period
between 2015/2016 being a large positive anomaly when the company
ramps up significant revenue streams from both Cruise and Descent.
Starts reaching a steady state
growth rate by 2017
On a total revenue basis, we estimate that the rate of growth in sales will
remain steady at 15 percent during the period 2017 – 2021.
This is driven in majority by the Aventus software division sales growth rate
but gradually declines, while simultaneously other project endeavors as
Wake Vortex would most likely create revenues.
It is not rational to set a defensible growth rate in the higher intervals of the
aforementioned two digit rate as that would assume the majority of the
contracts would esteem from single years which is less likely, along with the
more pronounced threat in future periods by the competition.
Company analysis
51
COMPANY ANALYSIS 28 January 2015
In terms of margins we expect EBIT-margins to be around 30 percent
between the period 2017 – 2021 due to competition and with margins
peaking at approximately 40 percent in 2018, when the company reaches a
more steady state scenario. Nevertheless, this is highly contingent on the
RSA rate, the rate of consultancy projects and investments in personnel, the
development of competitive software, relative to total revenues, which could
all significantly impair the margin. To ensure sustainability of the long term
margins Redeye assumes that the company can activate another revenue
generating unit with similar software margin potential. Along with the
possibility of intensifying resources on other projects, the company will
most likely have to step up its efforts to be in par with competition, in other
terms when its products are more appreciated for its worth by flight in the
industry in general as well as with other flight planning system providers,
this scenario is certainly possible. Our estimates reflect all these factors but
certainly not at a long term rate of 25-30 percent RSA level, it is more
probable that the RSA level will be in the lower interval of 40-50 percent.
This reflects that the composition of sales will be more equally distributed
between the meteorology providers in the future.
Further investments from
meteorology providers leads
to sustained high levels of RSA
– but is partially compensated
by a better negotiation
position
However, in the longer term due to the previously mentioned factors, the
margin is also withheld on a high level by further investments of
meteorology providers but partially compensated by a likely stronger
position for AVTECH from a negotiation standpoint due to scale.
CAPEX investments are negligible and the maintenance expenses for
updating the Aventus software as well as other projects is by large taken in
OPEX. The results are that our CAPEX investments are held at low levels
but with still assumptions of development costs taken directly in OPEX.
As a consequence of the relatively high margins, we expect that AVTECH
will distribute 80 percent by 2017 of its net earnings leaving enough room
for its investment expenses and working capital needs.
Taxes are estimated to be eliminated until 2017 when the total amounts of
deferred tax assets are exceeded. The total tax assets are 27 MSEK,
providing earnings stability at least for the next three years.
Along with the rating parameters, the discount rate is set to 12.8 percent
which among other factors reflect the risk of not fulfilling the estimated
Cruise contracts and competitive escalation. The profitability component of
the rating will most likely be increased when the profitability is established
in the coming years which will lead to a somewhat lower discount rate. The
discount rate along with the assumptions of the model leads to a DCF value
of approximately 7 kronor per share.
Company analysis
52
COMPANY ANALYSIS 28 January 2015
Earnings and Multiple Analysis
From an acquirer’s perspective and investor perspective, the stand-alone
approach valuation contributes to valuable insight of the valuation of the
company along with a life endurance estimation of the Aventus division.
EV/EBIT largely relevant as a
measurement of distributable
earnings to shareholders
Looking on the Aventus
division the stock has an
upside in the future to 9-10
SEK per share
The choice of multiple in this analysis comes to the EV/EBIT approach as it
is arguably more representative of the long-term earnings power than the
EV/EBITDA as there are CAPEX investments that will exceed depreciation.
Albeit, the CAPEX investments are relatively insignificant relative to
earnings, as well as non-existent need of working capital, taxes and interest
are also negligible for a reason, ensuring that we are using a figure that
actually represents distributable earnings. Now, for a company with the
assumed premium position in a niche market for the Aventus Descent
solution, along with the high probability of materializing a first-mover
advantage, some premium would arguably be warranted. Along with these
estimates is a natural hedge due to that RSA rate could expand quicker than
we thought due to re-negotiation and/or more equally distributed
geographical sales composition.
However, to provide a margin of safety in assessing the multiple interval
some specific issues must be addressed. Natural interest from flight
planning providers, the amount of time to reach a similar product,
overestimation of pricing and delays in materializing contracts are some of
the key areas that will likely affect margins and revenues negatively. Thus,
Redeye argues that a high-growth company multiple is not warranted
currently.
The cash balance in the coming three year period is expected to be between
40-60 MSEK but could have been larger if it were not for the assumption of
the large dividend payouts. As the growth pattern reveals itself gradually its
possible that the market would value the company on the basis of the
Aventus software division itself. In our adjusted scenario, with Aventus
Software division being the main driver of value we expect the company to
trade between an EV/EBIT adjusted multiple of 15-17 for 2016, which
would be equivalent to a stock price of approximately 500 – 560 MSEK or
9-10 SEK per share, a 10-25 percent upside in a relatively short-time
frame. This scenario comes with a significant shortcoming, relative to our
other scenarios as essentially it argues that the company maintain its
competitive standing in years to come without additional investments.
Redeye deems it is possible to maintain some of its competitive advantage
but not as significant if its investments through consultancy projects would
be preserved. It is a challenging task to establish a highly resistant market
position but in a largely undeveloped market it does not seem unlikely that
it could establish a solid position before any significant intrusion of
competitors.
Redeye believes that this is a multiple which an acquirer could buy the
company in the future for in regards to the position of Aventus NowCast, at
Company analysis
53
COMPANY ANALYSIS 28 January 2015
maturity stage the multiple would decrease to 7 to 2018 - thus significantly
decreasing the payback period.
Significantly lower cash flows
than expected will materially
impact the valuation of the
stock
Assesing the dividend yield
going forward the stock seems
to have some upside
On an entity level the
EV/EBIT valuation indicates
7-8 SEK per share similar to
the DCF model
The company is currently trading at a forward adjusted EV/EBIT multiple
of 11 for 2016. The reasoning becomes even more valid in 2017 with
increasing cash flow and the most likely strong position of the Aventus
NowCast portfolio in the market. However, it should be noted that beyond a
five-year horizon the commercial viability of the Aventus NowCast portfolio
becomes more uncertain. Although its position at that point of time would
be significant competitors and regulatory solutions could still pose serious
challenges. The multiple thus reflects that the company endures a more
intense competitive environment with relatively little maintenance CAPEX.
Long term contracts secure profitability for up and beyond five year
horizons which in 2016 and beyond will be significant out of establishing
itself as a market leader within its niche. However, if the cash flows from
the Aventus division is significantly lower than expectation a lower multiple
is warranted because the payback period will be significantly increased for
the investor. Essentially, this multiple have to prove itself through
consistency in contracts.
In 2016 alone, it is possible that the company could distribute its total cash
flow, approximately 24 MSEK, which would be equivalent to a yield of
approximately 7 percent which seems fair in light of the risks of the
company. However, if the company decided to halt the consultancy projects
and other investments, the distributable earnings would make the dividend
yield advance to almost 9 percent by 2016, which is what we deem many
investors would put significant attention to.
Consequently, given the position in the market, as well as the growth
prospects, a smaller dividend risk premium is warranted, especially beyond
2016. Earnings will make the dividend yield pass 10 percent by 2017 even
on an unadjusted basis. We take into account that the competitive arena in
2016, will likely be looking worse than today, if not any other business
adventure starts blooming which we still believe is likely. Given the size of
the Aventus NowCast market there is enough room for more participants.
There is therefore some upside similar to the adjusted EV/EBIT for 2016
and from a dividend yield perspective as well.
On a consolidated basis (entity level), the company is currently trading at
an EV/EBIT multiple approximately 16 for 2016, representing somewhat
largely fair value today on an entity basis. This is due to the reasoning of
that long term investments as Wake Vortex and consultancy projects can be
halted, but that decision would also raise an issue of whether it can
maintain its competitiveness in the longer term horizon and thus a
somewhat lower multiple is warranted. There are already significant
assumptions that must be fulfilled to manage this level of valuation which
we deem can cause the multiple to become abnormally high. Thus,
Company analysis
54
COMPANY ANALYSIS 28 January 2015
EV/EBIT for 2016 at approximately 15-16x or 7-8 SEK per share seems
fair on an entity level.
However, we do not expect the company to announce a dividend of its total
cash flow, despite its capacity to do so theoretically given its large net cash
position. It would however make sense in the case where the company’s
management realizes whether it is worth giving up investment projects such
as the Wake vortex or other consultancy projects. This is perceived as an
unlikely outcome as these will to some extent produce revenues, especially
the Wake Vortex project.
Other risks that are included in estimating an appropriate multiple was
prolonged procurement processes, especially among legacy carriers, which
are laggards relative to low-cost carriers, along with intensifying
competition in full flight and Descent systems, priority scheme of cost
actions by the carriers and existing life of contracts would need to be
accounted for to accurately depict a rational multiple. In contrast, there are
significant triggers including underestimation of amount of low-cost carrier
contracts and/or larger legacy carriers, higher benefit level of Cruise and
Descent, where Cruise would have a significantly higher impact, which act
as somewhat of a cushion for the perceived risk of the company reflected in
the multiple.
Company analysis
55
COMPANY ANALYSIS 28 January 2015
Scenario Analysis
Three different scenarios are presented in order to indicate the valuation
based on the DCF model for different circumstances of the company’s
future. The scenarios span from the most realistic negative scenarios to
positive scenarios.
Bear case scenario
Most likely negative scenario
will result in significantly less
number of flights
In this scenario we assume that the process of gaining new contracts within
Cruise will be more difficult than the estimated, resulting in Average Cruise
flights being approximately 130000 by 2016. We still expect that the
implementation of Cruise with SWA will happen by Q3/Q4 in 2015,
providing somewhat of a security level to the above estimate. Management
might also tend to invest its resources less rationally when the company
becomes cash flow positive. These investments might not yield any or only
partial revenues in the future. The RSA rate will be retained at a high level
mainly due to delayed procurement processes affecting its negotiation
standing, worse geographical mix of contracts and investments by the
meteorological providers will materialize but are significantly delayed and
thus do not yield significant top-line benefits for AVTECH.
Existing contractual arrangements and with the priority of cost savings
measures being more profound, procurement process delays will have an
effect on larger legacy carrier orders. This will significantly impact the
margins on the downside.
Aventus Descent will produce the same results as our base case but with
lower KG savings than expected and along with a prolonged period of the
five percent level. Ultimately this leads to a negative impact on the sales
growth rate. The probability of this scenario is 25 percent leading to a DCF
value of 4.5 SEK per share.
Assumptions

By the end of 2015 the company will reach approximately 300000
flights in total. The RSA rate is expected to be at a higher interval of
45-55 percent (vs base 40-45 percent) on average during the whole
period of 2015-2022.

Savings amount of 10-15 KG for Descent with Cruise being 200 kg
on average during the whole estimation period. Five percent benefit
level for Aventus Descent between the period 2015-2017 and one
percent benefit level for Cruise between the period 2015-2017, then
it will gradual increases for both flight types initiates.

Revenue growth rate congestion due to the above factors to around
12 percent on average for the period 2015-2021. EBIT margin set to
be lower on average by 20 percent during the period 2015-2021.
Company analysis
56
COMPANY ANALYSIS 28 January 2015
Base case scenario
In line with the temporary competitive advantage of Aventus Descent and
associated products, we believe that the company can build up a strong
niche and revenue growth with several Airlines in the shorter term (1-2
years), for primarily low cost carriers. Legacy carriers will notice SWA’s new
cost benefit eventually and/or AVTECH will make sure of making legacy
carriers aware. Aventus Cruise with SWA will most likely materialize by
Q3/Q4 2015 with subsequent orders of Aventus Cruise in a half year later
(adhering the same pattern as for Aventus Descent but a tad slower due to
competitive reasons) leading to average number of 145000 Aventus Cruise
flights in 2015.
Competition will likely be intensified by 2016 leading to slower rate of
procurement process success which sets a roof for the benefit level and
growth rate beyond 2016. However, regulatory presence ensures that
AVTECH maintains some momentum in this market.
In the base case scenario
revenues in the longer term
are supported by decreased
forecast intervals
In the longer term, we expect that the benefit savings increases as the
meteorological providers wind feed data become more real-time,
supporting revenue growth. In conjunction with this notion is the
assumption of a relatively high RSA-rate, which seems reasonable
considering the large investments that must be performed from
meteorological providers to maintain a high-end product.
However, as the geographical contracts are likely to increase relative to the
dominant portion of US contracts today, there should be considerable
potential in increasing its operating margin; while slow and possibly
underappreciating the RSA-rate slightly, it should gradually decrease to a
long-term rate of 40 percent. However, we do see that tests and/or failure
from Panasonic to deliver on its investments will most likely lead to a lower
RSA rate than estimated. The increased mix of consultancy revenues
accompanied with greater competitive forces in the longer term could
impair the revenues along with overestimation of fuel savings. The
probability of this scenario is 50 percent leading to a DCF value of 7 SEK
per share.
Assumptions

By the end of 2015 the company will reach approximately 420000
total flights. The RSA rate is pegged at 45 percent initially but
gradually decreases from 2016 to 40 percent.

Fuel savings for Aventus Descent gradually rises from 15 KG to 2530 KG along with Cruise gradually increasing from 200 KG to 300
KG during the estimation period. On average the company will
reach the ten percent benefit level for Aventus Descent during the
period 2015-2017 and Cruise will reach two percent benefit level by
late 2016/early 2017.
Company analysis
57
COMPANY ANALYSIS 28 January 2015

The revenue growth rate will be close to 25 percent on average for
the period 2015-2021, with the majority of growth coming in the
upcoming two years. EBIT margin will be approximately 30 percent
during the period 2015-2021.
Bull case scenario
Revenue in the longer term
supported by decreased
forecast intervals
The bull case scenario involves a more rapid degree of successful
procurement processes by 2016, as a result of primarily successful low-cost
carriers due to more intensive sales efforts. This development is also led by
faster adaption of airlines than expected and from a more pronounced
effect of the regulatory presence on the airline carriers’ implementation
speed.
Along with a higher degree of European low cost carriers relative to the
total contract revenues, the RSA rate will reach 40 percent during 2016.
Subsequently due to tests along with differences in mix of will gradually
decrease to 35 percent in the longer term. Wake Vortex will start generating
revenues by 2018 on a license basis induced on airports which will initially
be largely negligible. The probability of this scenario is 25 percent leading to
a DCF value of 15 SEK per share.
Assumptions

By end 2015 the company will reach approximately 600000 total
flights fulfilling management estimates. RSA rate is set to 40
percent initially but gradually decreases from 2016 to 35 percent as
the geographical mix changes more than expected along with
successful benchmark test outcomes.

KG savings for Aventus Descent gradually rises from 20 KG to 3035 KG along with Cruise gradually increasing from 200 KG to 300350 KG in the longer term. On average the company will reach the
ten percent benefit level for Aventus Descent during the period
2015-2017, providing significantly higher KG savings across all
segments. Cruise will reach two percent benefit level for Cruise by
late 2016/early 2017.

The revenue growth rate will be close to 35 percent on average for
the period 2015-2021, with the majority of growth coming in the
upcoming three years. EBIT margin will be approximately 45
percent during the period 2015-2021.
Company analysis
58
COMPANY ANALYSIS 28 January 2015
Summary Redeye Rating
The rating consists of five valuation keys, each constituting an overall
assessment of several factors that are rated on a scale of 0 to 2 points. The
maximum score for a valuation key is 10 points.
Rating changes in the report
Management 6.0p
The current leadership have substantial experience within developing
systems and also core competencies as Pilots. During the years the
company have made several steps in harsh times that we consider the
right action. Although, historically the management have not delivered
on its estimates, it is not the cause of necessarily bad products, its rather
the consequence of an stagnant industry. Arguably lack of focus have
been a problem for the company previously, this have been improved
lately with main focus being Aventus NowCast Descent/Full flight
efficiency systems.
Ownership 8.0p
Ownership of the company is aligned to a few larger shareholders whom
have been operationally active in the company for several years. These
people will most likely add value in the future by their experience and
persistence. However, we think an institution and some board realignments would be healthy for the growth phase the company is now
transitioning to.
Growth prospect 6.5p
The market for optimized CDA and Cruise being largely undeveloped and
the fact that airlines companies are moving down the ladder of priorities
in savings would likely mean more successful procurement processes in
the future. The problem lies in that successful procurement processes in
the sector lies within that many companies prioritize other efficiency
measures first and the often bureaucratic organization for legacy carriers
does not benefit AVTECH. There exists significant potential for an
innovative company like AVTECH to succeed in a niche market like CDA
and reverse its way to whole flight planning through this niche. Whole
flight planning systems are more competitive than optimized CDA
solutions but the largely untapped market along with that low-cost
carriers seeks to optimize its costs, solutions as AVTECH’s, should
become more interesting.
Profitability 1.0p
Historically the company has been unprofitable accompanied with
several equity issues to support the growth potential. The company will
soon be profitable because of its Aventus NowCast Descent product and
most likely its cruise solutions which will make this rating gradually
increase as the profitability trend gradually establishes itself.
Financial strength 5.0p
The liquidity of the company is expected to secure funding for product
development required to enable the growth in the longer term. The
financial strength consists of approximately 40 million SEK in cash after
debt repayments. The reason for its relatively weak rating, considering its
cash position, is because historically the company had a significantly
weaker balance sheet.
Company analysis
59
COMPANY ANALYSIS 28 January 2015
Income statement
Net sales
Total operating costs
EBITDA
2012
11
-17
-6
2013
10
-16
-6
2014E
15
-15
0
2015E
43
-33
9
2016E
78
-50
28
Depreciation
Amortization
Impairment charges
EBIT
-3
0
0
-10
-4
0
0
-10
-4
0
0
-4
-4
0
0
5
-4
0
0
24
Share in profits
Net financial items
Exchange rate dif.
Pre-tax profit
0
0
0
-10
0
-1
0
-10
0
0
0
-5
0
0
0
5
0
0
0
24
Tax
Net earnings
0
-10
0
-10
0
-5
0
5
0
24
2012
2013
2014E
2015E
2016E
0
4
0
1
5
2
5
0
1
8
44
3
1
1
50
41
13
4
1
59
62
8
8
1
79
2
0
0
0
0
13
0
15
0
4
0
0
0
0
12
0
17
0
4
0
0
0
0
13
0
18
0
4
0
0
0
0
14
0
19
0
4
0
0
0
0
15
0
20
0
21
25
67
78
99
Balance
Assets
Current assets
Cash in banks
Receivables
Inventories
Other current assets
Current assets
Fixed assets
Tangible assets
Associated comp.
Investments
Goodwill
Cap. exp. for dev.
O intangible rights
O non-current assets
Total fixed assets
Deferred tax assets
Total (assets)
Liabilities
Current liabilities
Short-term debt
Accounts payable
O current liabilities
Current liabilities
Long-term debt
O long-term liabilities
Convertibles
Total Liabilities
Deferred tax liab
Provisions
Shareholders' equity
Minority interest (BS)
Minority & equity
2
4
3
9
3
0
0
12
0
0
8
0
8
1
5
1
6
3
0
0
9
0
0
16
0
16
2
1
1
4
0
0
0
4
0
0
63
0
63
0
9
1
9
0
0
0
9
0
0
69
0
69
0
8
1
9
0
0
0
9
0
0
90
0
90
Total liab & SE
21
25
67
78
99
2012
11
-17
-3
-10
0
-10
3
-6
1
-19
2013
10
-16
-4
-10
0
-10
4
-6
-2
-6
2014E
15
-15
-4
-4
0
-4
4
0
-2
-5
2015E
43
-33
-4
5
0
5
4
9
-6
-5
2016E
78
-50
-4
24
0
24
4
28
1
-5
-23
-14
-8
-1
24
Capital structure
Equity ratio
Debt/equity ratio
Net debt
Capital employed
Capital turnover rate
2012
40%
67%
6
14
0.5
2013
64%
23%
2
18
0.4
2014E
94%
3%
-42
21
0.2
2015E
88%
0%
-41
28
0.5
2016E
91%
0%
-62
28
0.8
Growth
Sales growth
EPS growth (adj)
2012
0%
0%
2013
-8%
-70%
2014E
45%
-66%
2015E
190%
-220%
2016E
84%
344%
Free cash flow
Net sales
Total operating costs
Depreciations total
EBIT
Taxes on EBIT
NOPLAT
Depreciation
Gross cash flow
Change in WC
Gross CAPEX
Free cash flow
DCF valuation
WACC (%)
12.8 %
Assumptions 2015-2021 (%)
Average sales growth
25.0 %
EBIT margin
33.3 %
Profitability
ROE
ROCE
ROIC
EBITDA margin
EBIT margin
Net margin
Cash flow, MSEK
NPV FCF (2014-2016)
NPV FCF (2017-2023)
NPV FCF (2024-)
Non-operating assets
Interest-bearing debt
Fair value estimate MSEK
10
137
251
2
-4
396
Fair value e. per share, SEK
Share price, SEK
7.0
8.0
2012
0%
-137%
0%
-56%
-86%
-90%
2013
-86%
-58%
-70%
-56%
-95%
-102%
2014E
-11%
-10%
-24%
-2%
-30%
-31%
2015E
8%
8%
25%
22%
13%
13%
2016E
30%
30%
86%
36%
31%
31%
Data per share
EPS
EPS adj
Dividend
Net debt
Total shares
2012
-0.78
-0.78
0.00
0.43
12.82
2013
-0.23
-0.23
0.00
0.05
44.86
2014E
-0.08
-0.08
0.00
-0.75
56.50
2015E
0.10
0.10
0.05
-0.73
56.50
2016E
0.42
0.42
0.34
-1.10
56.50
Valuation
EV
P/E
P/E diluted
P/Sales
EV/Sales
EV/EBITDA
2012
44.0
-3.9
-3.9
3.5
4.0
-7.2
2013
136.7
-13.0
-13.0
13.3
13.5
-24.1
2015E
408.2
83.4
83.4
10.5
9.6
43.5
2016E
387.3
18.8
18.8
5.7
4.9
13.9
-4.6
-14.1
2014E
407.0
-99.9
-99.9
30.6
27.7
1,424.4
-92.8
EV/EBIT
Share performance
1 month
3 month
12 month
Since start of the year
Shareholder structure %
Christer Staaf & Lars Lindberg
Avanza Pension
Christer Fehrling
S-Bolagen AB
Peter Muth
Cbldn-Saxo Bank A/s
Mats Tonsjö
Lars Bäckvall
Lars Wahlund
Johnny Ohlson
Share information
Reuters code
List
Share price
Total shares, million
Market Cap, MSEK
-3.6
-4.8
231.3
3.3
%
%
%
%
Growth/year
Net sales
Operating profit adj
EPS, just
Equity
Capital
13.2 %
18.0 %
4.2 %
2.4 %
3.8 %
3.4 %
2.7 %
2.1 %
1.8 %
1.8 %
75.8
16.2
12/14e
15.6 %
-32.1 %
-68.0 %
176.4 %
Votes
42.0 %
7.4 %
4.2 %
3.0 %
1.6 %
1.4 %
1.1 %
0.9 %
0.7 %
0.7 %
AVTCHb.ST
First North
8.0
56.5
449.2
Management & board
CEO
CFO
IR
Chairman
Christer Staaf
Jonas Saric
Jonas Saric
Lars GV Lindberg
Financial information
FY 2014 Results
February 13, 2015
Analysts
Philip Skogby
[email protected]
Company analysis
60
Redeye AB
Mäster Samuelsgatan 42, 10tr
111 57 Stockholm
COMPANY ANALYSIS 28 January 2015
Revenue & Growth (%)
EBIT (adjusted) & Margin (%)
90
80
70
60
50
40
30
20
10
0
200,0%
150,0%
Net sales
2015E
2016E
-60,0%
2011
2012
2013
2014E
2015E
2016E
-80,0%
-10
-100,0%
-15
-120,0%
EBIT adj
EBIT margin
Equity & debt-equity ratio (%)
0,6
0,6
0,4
0,4
0,2
0,2
0
0
2011
-40,0%
Net sales growth
Earnings per share
-0,2
-20,0%
0
-5
-50,0%
2014E
0,0%
5
0,0%
2013
20,0%
20
10
50,0%
2012
40,0%
25
15
100,0%
2011
30
2012
2013
2014E
2015E
2016E
-0,2
-0,4
-0,4
-0,6
-0,6
-0,8
-0,8
-1
-1
EPS, unadjusted
1
0,9
0,8
0,7
0,6
0,5
0,4
0,3
0,2
0,1
0
80,0%
70,0%
60,0%
50,0%
40,0%
30,0%
20,0%
10,0%
0,0%
-10,0%
2011
2012
EPS, adjusted
2013
Equity ratio
2014E
2015E
2016E
Debt-equity ratio
Sales division
Geographical areas
Conflict of interests
Company description
Philip Skogby owns shares in the company : No
AVTECH Sweden AB develops and sells products and services in the
area of digital air traffic management worldwide. The company
provides Aventus NowCast systems that optimize continuous descent
approaches by digital uplinking of wind information to the aircraft?s
computed optimized trajectory.
Redeye performs/have performed services for the Company and
receives/have received compensation from the Company in connection
with this.
Company analysis
61
COMPANY ANALYSIS 28 January 2015
DISCLAIMER
Important information
Redeye AB ("Redeye" or "the Company") is a specialist financial advisory ooutique that focuses on small and mid-cap growth companies in the Nordic
region. We focus on the technology and life science sectors. We provide services within Corporate Broking, Corporate Finance, equity research and
investor relations. Our strengths are our award-winning research department, experienced advisers, a unique investor network, and the powerful
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Redeye Rating (2015-01-28)
Rating
Management
Ownership
23
52
2
77
33
38
6
77
7,5p - 10,0p
3,5p - 7,0p
0,0p - 3,0p
Company N
Growth
Prospect
11
64
2
77
Profitability
7
31
39
77
Financial
Strength
17
32
28
77
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Copyright Redeye AB.
Company analysis
62