Fluence Corporation Limited

Company Overview: Fluence Corporation Limited (ASX: FLC) is engaged in providing cost-effective decentralized water, wastewater, and reuse solutions. It operates primarily into three business segments; Smart Products Solutions (SPS)- wastewater treatment solutions leveraging patented, proprietary MABR technology, Custom-Engineered Solutions (CES)- turn-key projects offering customised solutions, Recurring Revenue (RR)- Build, Own, Operate and Transfer & aftermarket sales & spare part sales.

FLC Details

Business Shift to High Margin Products to Aid Growth: Fluence Corporation Limited (ASX: FLC) provides water and wastewater treatment solutions. The market capitalisation of the company as on 19 February 2021, stood at ~$137.46million. The company has recently repositioned its strategy to focus on MABR based Smart Products Solutions. The Membrane Aerated Biofilm Reactor (MABR) technology provides superior wastewater treatment, enhanced by substantial energy savings and increased capacity of treatment. It has over 200 MABR installations operating at a global level, including the Aspiral and SUBRE installations. It has increased its market share by building large capacity plants by deploying Submerged MABR technology (SUBRE), and serves the residential clusters with the Aspiral Micro product.

The company is well-positioned to capture the needs of the growing addressable market, as there is a shift towards decentralized and pre-engineered solutions owing to population growth, water scarcity and environmental health hazards.

Q4FY20 Financial Update: FLC reported impressive performance during the quarter with an increase in revenue to US$23.5 million, up by 51% from Q3FY20 levels. The operating expenses were down by 34% to US$8.4 million from Q4FY19. There was a positive operating cash flow of US$33.4 million during the quarter. The cash balance improved to US$31 million as on 31 December 2020, compared to US$21.9 million during the end of the previous corresponding period.

Cash position during Q4FY20 (Source: Company Reports)

FY20 revenues increased by 58% to ~US$96.5 million from ~US$61 million in FY19. There was a reduction in operating expenses to US$29 million from US$40.1 million during the same period over the last year. The receipt of advanced payment amounting to US$60 million with respect to the Ivory Coast project is on schedule with the completion of the initial design phase.

Positive Underlying EBITDA Performance: The company achieved its 2020 guidance and also recorded its first underlying EBITDA positive year in FY20. It reported an improvement in EBITDA to positive US$1.4 million in FY20, compared to a loss of US$23.6 million in FY19. It has exceeded its SPS sales guidance in FY20, despite the impact of COVID-19 headwinds in the business environment. It delivered SPS sales of US$32.4 million during the year. The recurring revenue sales stood at US$8.1 million, which is below the guidance of US$9 million owing to the delays in the Peru project. FLC reported a comfortable pipeline position with a backlog of US$226 million as on 31 December 2020.

FY20 EBITDA Performance (Source: Company Reports)

Moving Towards Favourable Revenue Mix: The company has realigned its product strategy and is moving towards an increased mix of sales from the Smart Products Solutions (SPS). The Group’s strategic focus is on the sale of MABR products in China and SE Asia, Nirobox in Middle Ease & SE Asia and timely execution of the Ivory Coast project. The company is also focused on increasing its share of recurring revenue, in its pursuit to achieve a higher margin.

Revenue Mix (Source: Company Reports)

Increase in SPS Sales: FLC has witnessed continuous improvement in the sale of Smart Products Solutions (SPS) over the past three years. It reported revenues of US$32.4 million in FY20, compared to US$22 million in FY18. There was also a corresponding increase in the MABR plants sold to 235 in FY20 from 2 in FY17. FLC had several key strategic MABR wins in Cambodia and the Philippines & Nirobox wins in Arabian Gulf, Vietnam and Philippines.

Rise in SPS sales (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders together form around 53.36% of the total shareholding while the top 4 constitute the maximum holding. RSL Investments Corporation and Watermark Services, LLC are holding a maximum stake in the company at 26.47% and 8.46%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Key Metrics: The company reported a decent increase in gross margin performance to 32.5% in H1FY20 from 14.3% in H1FY19. EBITDA margin stood at 11% during H1FY20, and there was a positive net margin of 3% during the same period. There was an improvement in ROE to positive 4.4% in H1FY20 from a negative 42.4% when compared to the previous corresponding period. There was also an improvement in the cash cycle days to 238.3 days in H1FY20 from 395.5 days in the previous corresponding period. The borrowings of FLC stood at US$3.74 million as on 30 June 2020.

Growth and Profitability Profile (Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)

Key Risks: The Group's operations expose it to a variety of risks including, market risk, currency risk, interest rate risk, credit risk and liquidity risk. It undertakes a significant number of transactions denominated in foreign currency and therefore is exposed to currency risks. FLC’s global operations include intergroup transactions, which is considered to be associated with high risk given the complexity of such deals. The company operates at a global platform and has its key markets in China, Middle East and Europe, which have been severely impacted by the COVID-19 pandemic. It has witnessed business repercussions in Italy due to the severe impact of the COVID-19 virus in that region.

Outlook: The company has reported resilient performance in FY20 and has achieved its guidance, reporting its first EBITDA positive year. It is optimistic on its prospects for FY21 and has given a guidance of continued positive underlying EBITDA and will strive for further improvements in operating efficiency. The strategic focus of the company lies on increased sale of MABR and Nirobox in its key markets and timely execution of the Ivory Coast project. It will look for growth in recurring revenue which will further provide margin comfort to FLC.

Valuation Price to Sales Based Market Multiple Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Stock Recommendation: FLC has given FY21 Smart Products Solutions (SPS) guidance of US$35- US$50 million. As per ASX, the stock of FLC is trading below its average 52-weeks’ levels of $0.170-$0.385. The stock of FLC gave a negative return of ~19.64% in the past three months and a positive return of ~21.62% in the past six months. On a technical analysis front, the stock of FLC has a support level of ~$0.189 and a resistance level of ~$0.28. We have valued the stock using 1-year forward Price to Sales market multiple (discounted 1.7x from the five years’ average considering FLC’s business risks and exposure due to its presence of operations in key markets around the globe, which have been severely impacted by the COVID-19 pandemic) to FY21E consensus sales of ~US$155.3 million and have arrived at an indicative target price of lower double-digit growth (in % terms). Considering the current trading levels, expected upside in valuation, decent financial performance, approach to favourable sales mix with higher-margin products and a decent increase in SPS sales over the past three years, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.225, up by 2.27% as on 19 February 2021.

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

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