The Pivotal Point For AVTECH
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 28 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 29 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 30 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 31 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 32 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 33 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 34 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 35 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 36 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 37 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 distribution channel redeye.se. Redeye was founded in 1999 and since 2007 has been subject to the supervision of the Swedish Financial Supervisory Authority. 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