Company Overview: Fluence Corporation Limited (ASX: FLC) is engaged in providing innovative, decentralised water, wastewater, and reuse solutions to its clients. It derives its revenue from – Smart Products Solutions (SPS): Includes products like Aspiral, NIROBOX and SUBRE, and made a revenue contribution of 54% in FY20. It also offers commissioning of decentralised solutions to meet a broad range of needs and offers ongoing operation and maintenance support, as well as Build Own Operate Transfer (BOOT) and other recurring revenue solutions. It has got a presence in the high growth markets of China, the Middle East, Southeast Asia, and North America.
FLC Details
Increase in Top-Line Aided by Increasing Order Book and Contracts: Fluence Corporation Limited (ASX: FLC) is engaged in the delivery of effective decentralised water, wastewater, and reuse solutions. The market capitalisation of the company as on 30 April 2021, stood at ~$131.21 million. In FY20, the company began to execute on the Ivory Coast water treatment project (IC). Post the completion of IC project in two years, the company plans to position itself to be a Smart Product Solutions based business, with the targeted gross margins in the range of 35% and EBITDA margins in the range of 15%.
During FY20, the company delivered a resilient performance with top-line growth of ~62% to ~US$97.4 million when compared to the previous corresponding year. The growth was aided by the increase in SPS revenue to US$32.3 million, which includes MABR sales of US$19 million, despite the COVID-19 headwinds on the business. It reported a positive underlying EBITDA of US$2.3 million during the year, compared to a loss of US$23.6 million in FY19. The operating expenses reduced by ~28% to US$28.6 million, on the back of prudent spending measures. The company had received an advance payment totalling ~US$60 million, for the completion of the preliminary engineering design phase of the Ivory Coast water treatment plant. It ended the year with a cash position of US$31 million and total borrowings of ~US$21.70 million as of 31 December 2020.
FY20 Financial Performance (Source: Company Reports)
Q1FY21 Trading Update: During the quarter, the company received new orders amounting to US$13.3 million, an increase of over 11% on Q4FY20. The SPS segment recorded an order growth to US$7.5 million, which includes US$5 million from bookings in China. It reported revenues of US$18.2 million during the period, with SPS making a revenue contribution of US$3.7 million. China reflected a revenue growth of over 38% on the pcp, demonstrating decent sales momentum in the market. It has a contracted backlog of US$191 million, of which the SPS backlog stood at US$23 million. There has been a continuous improvement in the efficiency of the company, with a reduction in operating expenditure by 10% from Q4FY20 levels. The cash position of FLC stood at US$14.9 million, and along with US$27.4 million in short and long-term liquid investments, provided operating reserves cushion to the company.
Adequate Operating Reserves (Source: Company Reports)
Profitable Water Solutions Deployment: The strategic focus of the group is to sell MABR in China and Southeast Asia, and NIROBOX in the Middle East and Southeast Asia. It is also looking for an increased recurring revenue base through the provision of water as a service in the US and Caribbean markets. FLC has also been looking to increase its revenue streams from the Smart Products Solutions (SPS) offerings and plans 65% of the contribution from this segment in the future.
Transition in Revenue Mix (Source: Company Reports)
Top 10 Shareholders: The top 10 shareholders together form around 53.5% 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 an improvement in the gross margin to 28.8% in FY20, compared to 16.2% in FY19. EBITDA margin stood at 2.1% during the year. There was an uptick in the asset turnover to 0.67x during the year, from a level of 0.44x in the previous corresponding year. It reported a debt-to-equity ratio of 0.88x in FY20.
Growth Profile and Profitability Metrics (Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)
Key Risks: The onset of the COVID-19 pandemic has given rise to uncertainty in the economic environment. This may lead to the cancellation of projects or contracts with FLC, which might impact the profitability of the company in short to medium term. The company has business in different parts of the world, and as such, undertakes a significant part of its transactions in foreign denominated currencies. Hence, it is exposed to the risk of currency fluctuation. The Group is also exposed to change in interest rate risk, as it holds a considerable amount of cash and equivalents on its balance sheet. FLC is prone to credit risks, in regards to its receivables, and as such, it has to review the risks periodically through the application of credit assessment criteria.
Outlook: FLC expects further improvement in its operating efficiency going forward, and grow its Smart Products Solutions (SPS) revenue base. The key priorities of the company are to sign new strategic partnerships in China and the Middle East, and secure substantial new contract wins in its focused markets of the US, China, Southeast Asia and the Middle East. It has reiterated its FY21 SPS revenues to be between US$35- US$50 million. It will also look for continued execution of the Ivory Coast Water Treatment Project. FLC looks to be poised for growth moving forward, and expects positive underlying EBITDA for FY21.
Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)
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Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group
*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.
Stock Recommendation: The company has announced that it has been awarded its first volume contract for the Yangtze River Great Protection Program managed by China Three Gorges Group Corporation. The order has been valued at US$2.2 million and includes 29 Aspiral MABR units. It has also been awarded an additional contract by Beijing China Railway Science New Technology Co. Ltd, worth US$28K. As per ASX, the stock of FLC is trading below its average 52-weeks’ levels of $0.170-$0.330. The stock of FLC gave a negative return of ~24.99% in the past six months and a negative return of ~7.14% in the past one month. We have valued the stock using an EV/Sales multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at a slight premium to its peer median EV/Sales (NTM trading multiple), considering the decent rise in new orders, improved profitability and an improvement in margin performance. For the purpose, we have taken peers such as Scidev Limited (ASX: SDV), Intega Group Limited (ASX: ITG), etc., which comes under Industrials Sector. Considering the expected upside in valuation and current trading levels, impressive financial performance in FY20, uptick in orders in Q1FY21, decent cash position and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.200, down by 4.762% as on April 30, 2021.
FLC Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.
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