Company Overview: Fluence Corporation Limited (ASX: FLC) is one of the leading players in the decentralised water, wastewater and reuse treatment of water. It offers a range of pre-engineered, standardised Smart Product Solutions (SPS). It also provides operational and maintenance support, as well as generates revenues through Build Own Operate Transfer (BOOT) business model. It has a presence in high growth markets comprising of China, the Middle East, Southeast Asia, and North America.

FLC Details

Decent Sales Performance Driven by Improved Margin Performance & Sales in China: The company deploys profitable water solutions and is focused on generating high margin products. In this regard, it has been progressing towards a product line comprising mostly of SPS solutions and targets a revenue mix of ~65% in the future from the segment. As of 2020, Smart Product Solutions contributed ~54% of the revenue mix, Custom Engineered Solutions contributed ~33%, and the balance of 13% being contributed by Recurring Revenue.

Recent Business Development Updates:

• The company’s first MABR plant in Sihanoukville, Cambodia has been fully commissioned and has commenced operations with the capacity to treat wastewater for 60,000 people.
• It has sold 15 MABR plants in Q2FY21 and a total of 34 plants during the year-to-date period. These plants were bought by existing China partners - Three Gorges, Hubei ITEST, Kaitian, Liaoning Huahong, and China Rail.
• FLC has sold a total of 281 MABR plants to date in 11 countries. It has a combined capacity to treat wastewater for 750,000 people.
• Reported an uptick in revenues from China in H1FY21 by ~45% on the pcp.

A Look into the Q2FY21 Results Summary:

The company delivered decent results during the period with a growth in revenue and a strong backlog of orders under its disposition.

• Increase in Revenues: Revenues grew by ~49% to US$27.2 million in Q2FY21, when compared to the prior quarter and increased by ~169% when compared to the pcp.
• Growth in China Sales: There has been increased traction in revenues from China, reflecting an increase of ~48% on the pcp.
• Positive EBITDA: FLC reported a positive EBITDA in Q2FY21 and delivered positive cash flow from operations at ~US$13 million.
• Operating Efficiency: The company reported a decrease in operating expenses by ~7% in H1FY21 when compared to the prior corresponding period.

It ended Q2FY21 with a strong balance sheet, having a cash balance of US$23.7 million and US$38.4 million in short and long-term liquid investments.

Trend in Cash and Short-Term Investments (Source: Analysis by Kalkine Group)

Update on the Progress of Ivory Coast Project: The company has continued to execute the Ivory Coast Project and has received ~US$20.1 million, as announced on 4 June 2021. It has completed the third milestone of the project on time and within a specified budget. The project has remained cash flow positive and is forecasted to remain cash flow positive during the project duration.

Top 10 Shareholders: The top 10 shareholders together form around 53.75% 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:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: The company reported an uptick in the current ratio to 1.31x in FY20 from a level of 1.21x in the prior year. There was also an improvement in the cash cycle to 147.9 days in FY20, from a level of 253.9 days in FY19. It reported total debt of US$28.4 million in FY20, comprising of US$25.2 million in long term debt and US$3.3 million in short term debt.

Growth Profile and Profitability Metrics (Source: Analysis by Kalkine Group)

Key Risks: The company is exposed to the following risk factors:

• Financial Risks: The Group’s activities expose it to financial risks such as interest rate risk, credit risk and liquidity risk.
• Foreign Exchange Risk: The company has a presence in different geographical locations, and as such, it is exposed to foreign currency risk.
• Geography Risk: It operates its projects in different locations of the world and is prone to the strict purview of local governments and regulatory bodies.

Outlook: FLC expects to be underlying EBITDA positive in FY21 and has reiterated SPS sales guidance in the range of US$35-$50 million in FY21. There has been an increasing trend of countries setting and executing high standards of wastewater treatment, and this puts FLC in a favourable position to leverage on its MABR solutions. The company continues to execute on its Ivory Coast project and remains on target for completion in early 2023.

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

Source: 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 reported strong backlog orders of ~US$175 million at the end of Q2FY21 period. As per ASX, the stock of FLC is trading below its average 52-weeks’ levels of $0.160-$0.330. The stock of FLC gave a positive return of ~2.56% in the past one year and a negative return of ~14.89% in the past six months. 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 performance, comfortable cash position and anticipated positive underlying EBITDA in FY21. For this purpose, we have taken peers such as Calix Ltd (ASX: CXL), Scidev Ltd (ASX: SDV), Lycopodium Ltd (ASX: LYL), to name a few. Considering the expected upside in valuation and current trading levels, impressive performance in Q2FY21, decent uptick in sales, continued execution of the Ivory Coast Project, decent long-term outlook and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.195, (as on 30 July 2021, 10:22 AM (GMT+10), Sydney, Eastern Australia).

FLC Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions 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 analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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