Company Overview: Fluence Corporation Ltd, formerly Emefcy Group Ltd, is an Israel-based company that is engaged in providing water treatment solutions. It offers decentralized, packaged water and wastewater treatment solutions. Its solutions include decentralized treatment, desalination, reuse, waste-to-energy, water treatment, wastewater treatment, food and beverage processing. It provides services and support for project financing and after-sale support. The Company offers water treatment products and wastewater treatment products. Water treatment products include NIROBOX SW, NIROBOX BW, ultrafiltration and reverse osmosis. Wastewater treatment includes MABR, NIRBOX WW, packaged plants, aeration equipment and dissolved air flotation. The Company operates in approximately 70 countries.
 

FLC Details

Contracted Backlogs Give Strong Visibility for Long-Term Growth: Fluence Corporation Limited (ASX: FLC) happens to be a leader in decentralized water, wastewater and reuse treatment markets and its market capitalisation, as on May 17, 2019, stood at ~$252.57 million. The company recently released its quarterly report for the period ended March 2019 in which the management stated that they had a great start to 2019 and there were bookings amounting to US$223 million for the quarter which has lifted the company’s total contracted backlog at 31 March 2019 to US$267 million, reflecting a rise of 181% on the YoY basis. In March 2019 quarter, the company witnessed robust sales of Aspiral™ units in China, Custom Engineered Solutions wins in Egypt and Ivory Coast as well as roll out and first commercial orders of SUBRE (or Submerged Membrane Aerated Biofilm Reactor). The company had made an announcement about US$50 million project finance facility with Generate Capital which is providing the customers with additional funding flexibility and it is also expanding the company’s opportunities pipeline. The first drawdown on facility occurred in the month of April 2019. There are expectations that further drawdowns would be supporting other projects which would allow faster contract closure as well as generation of long-term recurring revenues.

In March 2019 quarter, the company’s net cash used in the operating activities stood at $14.741 million and the receipts from customers amounted to $11.644 million. During the same period, the company had payments amounting to $14.604 million towards product manufacturing and operating costs while $7.841 million has been incurred towards staff costs.

Moving forward, the company is expected to be supported by decent debt/equity ratio (FY 2018) which reflects stable balance sheet as compared to the broader industry and the expansion of footprints into China. Also, the company stated that revenues of Smart Products Solutions happens to be in line with budget as well as on track to achieve forecasted revenue of over US$44 million in 2019. However, the company also faces financial risks such as market risk, liquidity risk as well as credit risk.
 

Net Cash Used in Operating Activities (Source: Company Reports)

Top 10 Shareholders: The following table gives a broad overview of the top 10 shareholders of Fluence Corporation Limited:

Top 10 Shareholders (Source: Company Reports)

Improvement in Key Ratios Strengthens Confidence: Fluence Corporation has witnessed improvement in its key ratios in FY 2018 on the YoY basis as its gross margin encountered the rise of 16.2% on the YoY basis and stood at 34.2% which implies improved position to meet its operating expenses. The improvement in the company’s key ratios further strengthens the confidence in its operational capabilities which might attract the attention of market players.

Also, the company’s Debt/Equity stood at 0.15x in FY 2018 which is lower than the industry median of 0.18x and it looks like that the company is having a deleveraged balance sheet as compared to the broader industry. The lower amount of debt in the company’s balance sheet reflects that the company’s balance sheet is stable as compared to the industry in which it operates.

A Quick Look on Contract for Brazil’s Largest Seawater Desalination Plant: Fluence Corporation had made an announcement that it executed US$10 million contracts for design, engineering and construction of 12,000 m³ /day seawater desalination plant for one of the world’s leading steel producers. The construction on this Custom Engineered Solution is expected to start in Q2 FY 2019 and it might be operational by Q4 FY 2020.

The top management of the company stated that Brazil happens to be one of the primary focus markets, as FLC enhances its footprint with local expertise.

FLC Is Focused Towards China: With respect to Aspiral™, Fluence Corporation had stated that China happens to be a primary focus for the company. In Q1 FY 2019, the value of new orders secured was greater than the revenue which was recognised during all of 2018. On the back of established sales and manufacturing facilities, the company is well positioned for the participation in the planned improvement of China’s rural wastewater treatment quality. In China, the contracts for Aspiral™ units have been secured through local partnership agreements. The company is having 26 partnership agreements in place, which cover 16 of China’s 23 provinces.


FLC’s Footprints into China Region (Source: Company Reports)

In Q1 FY 2019, the company got a bulk order for 40 Aspiral™ units to be deployed at the toll stations, parking lots as well as service areas across the highway system in Hubei Province. In the month of April 2019, the company entered into an exclusive distribution agreement with Aquatec Maxcon (AQM) in order to promote as well as sell Smart Packaged Aspiral™ MABR?based solutions in Australia.

Announcement of First Drawdown from US$50 Million Project Finance Facility: Fluence Corporation had made an announcement that it had drawn down for the first time on its US$50 million non-recourse debt facility which was provided by Generate Capital. The top management stated that this reinforces the synergistic relationship between Generate Capital’s project finance capabilities as well as FLC’s ability to offer recurring revenue solutions to the customers around the world.

Recurring revenue opportunities Might Support Future Growth Prospects: Fluence Corporation stated that the recurring revenue opportunities happens to be a primary strategic focus. In the month of April 2019, the company has made first drawdown amounting to US$2 million on the US$50 million Generate Capital non-recourse debt facility. It added that funds would be utilised towards financing the company’s first seawater desalination plant in the Bahamas, at a resort in North Bimini. The company has intentions to further use the facility towards several current and planned recurring revenue projects. The use would allow it to streamline project finance and would help to secure further BOOT plants with the potential to generate the recurring revenue.

A Brief Overview of Custom Engineered Solutions and Other Products: In the month of February 2019, Fluence Corporation inked a landmark €165 million commercial agreement with Federal Government of Ivory Coast. This agreement relates to the supply of 150,000 m³ /day surface-water treatment plant. There are expectations that financial close and construction commencement might take place by Q3 2019 end. The contract is anticipated to support up to US$20 million of revenue in 2019, US$80 million in 2020, and the remainder in 2021. In March 2019, the company’s Egyptian joint venture partnership named The International Co. for Water Services & Infrastructure (or IWSI), along with Hassan Allam EPC, was awarded US$74 million contracts to design as well as construct 40,000 m³ /day seawater desalination plant in New Mansoura.

The San Quintin, Mexico project happens to be on track with respect to commissioning in 1H of 2020. Out of the total revenue for the company amounting to US$34 million, US$13.5 million got recognised in 2018, US$1.6 million got recognised in Q1 FY 2019, and the remainder would be recognised over next twelve months. Once it is commissioned, the project would be generating an estimated average US$10 million in annual recurring billings for the span of 30 years.

What To Expect From Fluence: Fluence Corporation’s cash and cash equivalents amounted to US$24.3 million as at 31 March 2019. The additional US$3.5 million of cash inflow was expected in Q1 FY 2019. These funds are now anticipated to be collected in Q2 FY 2019. Considering the current contracts, Fluence anticipates cash receipts amounting to US$24.1 million from the customers during Q2 FY 2019 and US$30.6 million of cash payments. As a result, there are expectations for net operating cash outflow amounting to US$6.5 million in Q2 FY 2019. The company had also stated that net cash used in operating activities would decrease in the following quarters until the company witnesses sustainable EBITDA break-even in Q4 FY 2019.

Additionally, Fluence stated that, in FY 2019, Smart Products Solutions’ revenue is anticipated to be higher than US$44 million which represents a growth of over 100% on the YoY basis. Considering the existing backlog as well as current forecasts, the company is targeting sustainable EBITDA profitability for no later than Q4 FY 2019.

Stock Recommendation: The top management of Fluence Corporation had stated that its decentralised Smart Products Solutions provide the customers significant reductions in the energy consumption for their water or wastewater processing needs. They also added that the company is on track to generate sustainable EBITDA profitability on quarterly basis by Q4 FY 2019. Also, the company witnessed improvements in its key ratios in FY 2018 and this might gain traction among the market players.

Also, as evident from the company’s debt/equity ratio of FY 2018, the company’s balance sheet can be said pretty stable as compared to the broader industry median. Also, the company’s total revenue witnessed a significant CAGR growth of 463.88% in the span of five years i.e. FY 2014-FY 2018. The company’s business is primarily supported by increasing sales, expansion of footprint as well as securing recurring revenue contracts.

However, in the span of previous three months, the stock has delivered the returns of 40.30% while, in the time frame of past one month, the return stood at -12.15% which implies that the stock remained a bit volatile in the latest trading sessions.

On the backdrop of aforesaid factors, we give a “Speculative Buy” recommendation on the stock at the current market price of A$0.465 per share (down 1.064% on 17 May 2019).
 

FLC Daily Chart (Source: Thomson Reuters)

Disclaimer
 
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as personalised advice.