Fluence Corporation Limited

Company Overview: Fluence Corporation Limited (ASX: FLC) is one of the global leaders in the decentralized water, wastewater, and reuse treatment markets. It offers pre-engineered, standardized Smart Products Solutions, including Aspiral™, NIROBOX™ and SUBRE. The company also provides an integrated range of services across the complete water cycle to support and optimize water-related assets and other recurring revenue solutions. FLC has established operations in North America, South America, the Middle East, Europe, and China, and has an experience of operating in over 70 countries worldwide.

FLC Details

Long-Term Revenue Streams and Higher Margins: Fluence Corporation Limited (ASX: FLC) is the global leader in the delivery of innovative, cost-effective decentralized water, wastewater, and reuse solutions for business and communities anywhere in the world. As on 16 October 2020, the market capitalization of the company stood at ~$134.34 million. The company seems well-positioned to serve the fastest-growing markets across the water cycle. It is focusing on establishing a higher margin in the medium term, more reliable longer-term revenue streams with lower capital intensity.

During 1H20, FLC continued its strategy of growing sales in Smart Products Solutions and increasing its recurring revenue base. Despite the uncertain economic conditions because of the global pandemic, the company managed to report an increase of 142% in revenue to US$57.6 million, up from US$23.8 million in 1H19 and reported a decline of 16% in overhead costs to US$9.2 million. FLC retains a strong backlog of projects to drive growth in revenue in the remainder of 2020 and reported an EBITDA of US$6.2 million. The growth opportunities and the company’s higher margin segments has paved the path for continued EBITDA growth. The company reported a positive NPAT of US$1.7 million. During the half-year, the company achieved a financial close of the landmark commercial agreement of €165 million with the Federal Government of Ivory Coast.

During 1H20, net assets increased by US$587k to US$47.66 million from US$47.07 million in the prior corresponding period. The company has also entered a loan agreement with an affiliate of Upwell Water LLC to provide an initial non-dilutive finance facility of US$20 million, which can be increased to ~US$50 million at the company’s request and at Upwell’s discretion.

Given the strong presence of the company in China, FLC is anticipating similar volume agreements. As the increasing water scarcity becoming the greater risk, the company is expecting decent fundamentals for its water treatment solutions. It is exploring partnership and sales channel opportunities for NIROBOX^TM. It is implementing its strategy to be a global leader in decentralized water, wastewater, and reuse treatment markets.

1H20 Financial Highlights (Source: Company Reports)

Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of Fluence Corporation Limited. RSL Investments Corporation is the largest shareholder in the company, with a percentage holding of 26.47%.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Well Management of Costs and Healthy Balance Sheet: During 1H20, gross margin of the company witnessed an improvement over the previous half and stood at 32.5%, up from 17.1% in 2H19. In the same time span, net margin of the company went up to 3%, up from a negative margin in 2H19. Improvement in gross margin and net margin indicates that the company is well managing its costs and can convert its revenue into profits. During the half year, the company reported higher profitability with an increase in EBITDA margin to 11%, up from -36.2% in 2H19. In the same time span, Return on Equity saw an increase over the previous half and went up to 4.4%. This shows that the company is well managing the capital of its shareholders and can generate profits internally.

Looking into the balance sheet, current ratio of the company was stable and stood at 1.21x. During 1H20, Assets/Equity Ratio of the company was 3.25x, higher than the industry median of 2.37x. In the same time span, Debt/Equity Ratio of the company was 0.08x, lower than the industry median of 0.10x, indicating a healthy balance sheet.

Key Margins (Source: Refinitiv, Thomson Reuters)

Fluence Secures Desalination Project Upgrade in Egypt: The company has recently announced that it has secured a contract worth US$3.2 million from a semi-government utility company, International Company for Water Services to rehabilitate and upgrade a 12,000 m³/day seawater reverse osmosis desalination plant in Egypt. This project is likely to strengthen the company’s position as a growing and innovative provider of water treatment solutions in Egypt.

Growth in Smart Products Solutions Drives Higher Margins and Profitability: Smart Products Solutions have a strong margin profile and accounted for 43% of total revenue in 2019. In the near-term, the company is targeting a revenue mix wherein SPS has the highest percentage of revenue of ~66%. It reported a continued relationship with Hubei ITEST and made a sale of first Aspiral^TM System to Three Gorges Group for the Great Protection of Yangtze River and general contractor China Tiesiju Civil Engineering Group. It expects to generate revenue of US$234 million from backlog and is likely to witness continued transformation towards a standardized, pre-engineered, products-based business with reduction of fixed costs.

Revenue Mix (Source: Company Reports)

Key Risk: The current COVID-19 crisis presents the world with an unprecedented pandemic and tremendous economic disruption. As a result, new order bookings have slowed down in some geographic segments. However, the situation has improved and is steadily moving back to normal. Unlike many of its peers, it has sustained growth in recurring revenue and EBITDA profitability. The activities of the company are also exposed to a variety of financial risks- market risk, including currency risk, interest rate risk and price risk, credit risk and liquidity risk.

Future Expectations: FLC has streamlined its operations and is focused on timely collections from customers. FLC is seeing the benefits of being globally diversified, with the ability to rapidly adapt to changing economic demand. The company has also fast-tracked the reduction in overhead costs and is working on improving its operating efficiency. With continued strong growth in SPS segment, the company is likely to sign additional commitments from new partnerships. The company continues to focus on delivering products in a timely and efficient manner by utilizing a largely reliable and uninterrupted supply chain for manufacturing.

The company has provided guidance for FY20, wherein it expects to report revenue of US$32 million from SPS and is likely to remain EBITDA positive. It believes that there will be significant opportunities with countries focusing on infrastructure projects to provide clean water and treat wastewater in many developing regions.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The outbreak of COVID-19 is highlighting the fundamental need for safe water supply, and hence, FLC is strengthening its position as a leader in the global decentralized water and wastewater segment. FLC is likely to see continued strong growth of Smart Products Solutions and is aiming to convert initial strategic orders in China into bulk order agreements. As per ASX, the stock of FLC is trading very close to its 52-weeks’ low level of $0.170, proffering a decent opportunity for accumulation. The stock of FLC gave a negative return of 4.6% in the past three months and a negative return of 2.3% in the last one month. On a technical front, the stock of FLC has a support level of ~$0.178 and a resistance level of ~$0.251. Considering the current trading levels, decent returns in the past three months, increased demand of safe water from the outbreak of COVID-19 and positive long term outlook, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.205, down by 4.652% on 16 October 2020.

FLC Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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