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
Robust Order Inflow Supported FLC’s Contracted Backlog: Fluence Corporation Limited (ASX: FLC) happens to be a leader in decentralized water, wastewater and reuse treatment markets with the Smart Products Solutions, including Aspiral™, NIROBOX™ and SUBRE. As on August 30, 2019, the market capitalisation of the company stood at ~A$233.79 million. Recently, the company has released its 1H FY19 results wherein the group witnessed strong momentum for its MABR products. As per the release, the period was highlighted by receival of the largest individual order of 40 Aspiral™ units in China from Hubei ITEST, first commercial SUBRE order secured in China early in the second half of 2019, and 64 cumulative MABR projects' wins in China. Moreover, the company posted contracted backlog of US$278 million in 1HFY19, driven by strong order inflow. Further, the company stated that it closed a project finance facility worth US$50 million with Generate Capital in order to finance the construction of the recurring revenue projects and wrapped up the first drawdown amounting to US$2 million. The company generated total revenues amounting to $23.784 million in the six months to June 2019 from $32.805 million in half-year to June 2018.
Additionally, the company stated that Bimini project in the Bahamas is in the final stages of the commissioning, and there are expectations to start selling water shortly. San Quintin project is also expected to resume the construction in Q4 FY19. With this, we presume that the business has a favourable outlook in the long run and will continue to grow further based on the current momentum in the business.
1HFY19 Consolidated Income Statement (Source: Company Reports)
A Quick Look at Q2FY19 Results: The company released its results for the quarter ended June 2019 (Q2 FY19) in which its revenue amounted to US$11.3 million which brought the H1 FY19 revenue figure to US$23.6 million. Historically, the company’s revenue has been skewed to 2H of the year, and considering the backlog, the company stated that it again expects to generate a substantial amount of revenue in Q4. While the company has developed a strong reputation for its engineering capabilities, they are developing the track record as an owner and operator of projects. The company is witnessing strong demand for the project finance opportunities globally, and it expects to ink additional deals before the year-end. The company’s cash and cash equivalents stood at US$15.6 million as at June 30, 2019. FLC’s net cash used from operating activities in Q2 FY19 stood at US$7.8 million.
Net Cash Used in Operating Activities (Source: Company Reports)
Top 10 Shareholders: The following picture provides a broader overview of the top 10 shareholders in Fluence Corporation Limited:
Top 10 Shareholders (Source: Thomson Reuters)
Improvement in Key Margins: The company has witnessed an improvement in its key margins in FY 2018 on a YoY basis. The company’s gross margins stood at 34.2% in FY 2018, which is higher than the industry median figure of 24.3%. The company’s Debt/Equity ratio stood at 0.15x, which is lower than the industry median of 0.18x and, thus, it can be said that the company’s balance sheet is more deleveraged than the industry. Generally, a deleveraged balance sheet reflects stability and can help the company in meeting long-term growth objectives. Current ratio and Quick ratio stood at 1.22x and 0.98x, respectively, in FY18.
Key Metrics (Source: Thomson Reuters)
Inked a Letter of Intent with Yiyang High-tech Industrial District Management Committee: Fluence Corporation Limited has recently made an announcement that it has signed a letter of intent with Yiyang High-tech Industrial District Management Committee for the establishment of the final assembly facility for its proprietary Membrane Aerated Biofilm Reactor (or MABR) products. It was also stated that the increase in the assembly capacity was motivated by Memorandum of Understanding FLC has signed with a local partner named Aerospace Kaitian Environmental Technology Co., Ltd. to serve as preferred supplier to Kaitian for the wastewater treatment equipment.
Under MOU, and subject to the execution of binding purchase orders, Kaitian has indicated that it is targeting orders of Aspiral™ L4 to satisfy the capacity of 40,000 m3 /day or more through the end of 2021. In order to satisfy the potential demand, the Yiyang assembly facility would have an annual capacity of 120 Aspiral™ L4 units.
Executed its First Commercial SUBRE Order in China: Fluence Corporation Limited has made an announcement that it has executed a contract for the delivery of 3,000 m3 /day SUBRE system in Panjin, China. This represents its first commercial SUBRE order in China and the first order originated by a partner named Liaoning Huahong New Energy Co., Ltd. The units would be installed in greenfield wastewater treatment plant being constructed by the Panjin City Government.
The project would be consisting of 28 SUBRE units, each of which contains 3 of FLC’s proprietary MABR modules. In the release, it mentioned that the delivery is expected in the fall with an anticipated completion date by year-end 2019. Importantly, the SUBRE units will help the Panjin City Government to meet the stringent discharge requirements under China’s Class 1A wastewater discharge standards.
Revenue of Smart Product Solutions Rose 74% YoY: As per Q2FY19 report, the company stated that Smart Product Solutions’ revenue amounted to US$5.6 million in H1 FY19, reflecting a YoY growth of 74%. It was also mentioned that the reduced expectation for 2019 revenue in the Smart Product Solutions segment comes from the decrease in NIROBOXTM product forecasts considering the shift in sales mix in H1 FY19. When the revenue target was established, the company anticipated customers on key project wins, such as the US$10 million Brazil project, to select NIROBOXTM, but they decided to go with a bespoke project that falls under the Custom Engineered Solutions segment.
The company also stated that, for Aspiral™ and SUBRE (or Submerged Membrane Aerated Biofilm Reactor), the internal revenue expectations are unchanged for the year. The company continues to witness tremendous interest in the MABR-based products as the market recognises the lower electricity consumption and operating costs of the units.
What to Expect from FLC Moving Forward: Fluence Corporation Limited stated that Smart Products Solutions’ revenue is anticipated to be US$26 million which reflects a fall from the prior guidance of US$44 million, but it still represents a YoY growth of 18%. Additionally, it was mentioned that sustainable EBITDA profitability is expected to take place by Q4 FY19, however, it assumes the financial close for Ivory Coast in Q3 FY19. The company stated that, on the basis of the current contracts, FLC is expecting US$26.1 million of cash receipts from customers during Q3 FY19 and cash payments of US$32.1 million, leading to an expected net operating cash outflow of US$6.0 million for Q3 FY19.
With respect to Ivory Coast, the company informed that it remains on track to reach the financial close on €165 million Ivory Coast contract in Q3 FY19. It added that, since signing the commercial contract in the month of February this year, they have made significant progress with the financing parties towards meeting the pre-conditions to financial close, and it continues to expect up to US$20 million of revenue in 2019, US$80 million in 2020, and the remainder of the contract value in 2021.
Key Valuation Metrics (Source: Thomson Reuters)
Stock Recommendation: The stock of Fluence Corporation Limited has witnessed a rise of 17.57% in the span of previous six months, while in the time frame of past three months, the stock has fallen 8.42%. From the analysis standpoint, the company’s total revenue has significantly improved between FY14- FY18 and, thus, it can be said that the company is possessing decent capabilities to generate revenues. Also, during the same time frame, the company’s cash & equivalents have been improved and, therefore, it can be said that FLC has decent capabilities to build levels. It can be said that the company’s revenue-generation and cash building capabilities might support FLC in witnessing decent growth over the long-term. Currently, the stock is trading slightly below the average of 52 weeks high and low levels of $0.63 and $0.29, respectively, proffering a decent opportunity for accumulation. Hence, considering the aforesaid facts and current trading levels, we give a “Speculative Buy” recommendation on the stock at the current market price of A$0.420 per share (down 3.448% on 30 August 2019).
FLC Daily Technical Chart (Source: Thomson Reuters)
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