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.
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FLC Details
Strong Quarterly Sales and Continued Reduction in Costs: Fluence Corporation Limited (ASX: FLC) is the global leader in the delivery of innovative, cost-effective decentralised water, wastewater, and reuse solutions for business and communities. As on 14th February 2020, the market capitalisation of the company stood at ~$212.45 million. The company has recently released its results for the quarter ended 31st December 2019, wherein it reported strong quarterly sales boosted by smart products solution revenue. In the same time period, the company reported gross bookings of US$25.4 million and continued reduction in costs by 12% on year on year basis. The pre-engineered solutions gained traction in China with Smart Products Solutions revenue increasing to US$7.8 million. FLC’s MABR (Membrane Aerated Biofilm Reactor) systems remove over 500 tons of nitrogen and phosphorus, which are the major nutrients that cause pollution, and recycle more than 8.6 billion litres of water annually. The company has received its first MABR order from a customer in the USA and was also able to book its first service contract for NIROBOXTM installation in Barbuda. This resulted in an increase in recurring revenue backlog and expanded the company’s service capabilities. During the quarter, the company successfully raised A$38.3 million through a private placement and share purchase plan. This will underpin the company’s global growth plan by supporting continued expansion in China for MABR sales, geographic development of Smart Products Solutions offerings, cost optimisation, project guarantees for the Custom Engineered Solutions business and general working capital for the business. Fluence Corporation Limited is also monitoring the outbreak of coronavirus in China and has recently closed the Ivory Coast water treatment plant project.
With recognised operations in North America, South America, the Middle East, Europe and China, the company has an experience of working in over 70 countries, enabling businesses and communities to maximise their water resources. During the six months ended 30th June 2019, the company was awarded with one of the most significant projects, including the Ivory Coast contract of €165 million. During the half, the company also received a US$10 million order from a repeat customer for Brazil’s largest seawater desalination project. The steady order inflow resulted in record contracted backlog of US$278 million. During the half year ended 30th June 2019, FLC progressed on its recurring revenue strategy with revenue of $23.77 million and reduction in the cost of sales to $20.38 million.
The company is strongly positioned for growth and is seeking opportunities from several countries, including China and the USA. It is also anticipating recurring revenue contracts in FY20 and is targeting sustained EBITDA profitability. The company is focusing on key environmental and sustainability pillars and is strengthening its position as a leader in the global decentralised water segment.
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1H19 Financial Summary (Source: Company Reports)
Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of Fluence Corporation Limited. RSL Investments Corporation is the largest shareholder in the company, with a percentage holding of 26.71%.
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Top 10 Shareholders (Source: Thomson Reuters)
Profitable Operations and Well Deployment of Capital: During 1H19, gross margin of the company stood at 14.3% as compared to the industry median of 34.5%. Since FY16, the company witnessed a substantial improvement in EBITDA margin, implying more profitable operations and indicates the good financial health of the company. Over the same time span, net margin of the company also witnessed a significant improvement. This suggests that the company is managing its costs well and is capable of converting its revenue into profits. In comparison to the prior corresponding half, Return on Equity also witnessed an improvement, indicating that the company is well deploying the capital of its shareholders and is capable of generating profits internally.
Key Margins (Source: Thomson Reuters)
Financial Close for Ivory Coast Project: The company has recently announced that it has achieved the financial close on the €165 million Ivory Coast water treatment plant. This will allow the company to recognise revenue of at least US$20 million immediately. Post the close, the company will focus on the construction of surface-water treatment plant. The company has also secured a follow-on AspiralTM order of US$3 million from Aerospace Kaitian Environmental Technology Co. Ltd. This order will serve over a dozen towns and rural townships in China and is expected to satisfy the capacity needs of 40,000 m3/day or more by the end of 2021.
Containerized Order in Argentina and Follow-On Aspiral Order from ITEST: The company has announced the execution of a US$5 million contract which will provide a 10,320 m3/day pre-engineered and containerised Smart Products Solution water treatment system to a lithium mining project in Argentina. This will combine technologies to treat well water and provide filtered high purity, and potable water. The company also announced the execution of a US$3 million follow-on order for Aspiral™, received from a subsidiary of ITEST with the total capacity of 1,950 m3/day. The units will be installed at service stations and toll stations near highways in Hubei.
Progress in key regions during First Half 2019: Fluence Corporation Limited has been awarded 64 MABR projects from China representing a total capacity of around 16,000 m3/day. It also received its first commercial SUBRE order from Liaoning Huahong New Energy Co., Ltd. The pre-engineered solutions gained traction in China with Smart solutions revenue increasing to US$7.8 million in Q42019. The company also received a project worth US$1.7 million from Latin America and was selected for its wastewater treatment capabilities due to the low energy consumption of the project and high levels of nutrient removal. With respect to the commercial launch of the SUBRE product, the company announced two orders in Jamaica with Engineering and Technology Associates, INC. to serve two new housing developments in the Kingston and Spanish Town areas. During Q4 FY19, the company also received its first MABR order from a customer in Mexico and booked its first service contract for NIROBOXTM installation in Barbuda. The company also received an order for five NIROBOXTM from a customer in the Middle East, indicating that Fluence Corporation Limited is increasingly recognised as a leader for wastewater treatment solutions around the globe.
Financial Risk Management: The group’s activity is exposed to a variety of financial risks including market risk, credit risk and liquidity risk. The group carries out certain transactions denominated in foreign currency and hence is exposed to foreign currency risk. The company is also exposed to interest rate risks via the cash and cash equivalents that it holds. The main financial asset of the company is trade receivables, representing the maximum exposure to credit risk.
Future Expectations and Growth Opportunities: The company is strongly positioned for growth in the upcoming years and is expecting opportunities from China. The company announced about the financial closure of the Ivory Coast Project which will drive growth in FY20, subject to the outbreak of coronavirus in China. Revenue benefits from the project, which were earlier expected in 2019, have now moved into FY20 due to the delay in signing of the financial agreements. FLC is focusing on securing further recurring revenue contracts and expects a YOY increase of more than 20% or at least US$32 million in Smart Products Solutions revenue. This expectation is supported by the volume commitments of ITEST MABR orders, and recent additional orders from Aerospace Kaitian Environmental Technology and Liaoning Huahong New Energy. The company is also anticipating a year on year recurring revenue increase of approximately 30% to US$9.0 million, along with sustained EBITDA profitability. Fluence Corporation Limited is aiming for a business environment well aligned with the Sustainable Development Goals of the United Nations and is working to strengthen its position as a global leader in the decentralised water and wastewater segment.
On becoming sustainably EBITDA positive, the company is well-positioned to deliver on the high expectations in 2020 and beyond. FLC expects to sign further similar volume/bulk agreements owing to the existence of the company in different jurisdictions. On the basis of current contracts, the company anticipates cash receipts of US$22.0 million from customers in Q1 2020 and cash payments of US$27.8 million. This will result in an expected net operating cash outflow of US$5.8 million in Q1 FY20.
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Key Valuation Metrics (Source: Thomson Reuters)
Stock Recommendation: As per ASX, the stock of FLC is trading close to its 52-weeks’ low level of $0.310, proffering a decent opportunity for accumulation. The company is well-positioned for growth and has increased its revenue backlog. The company has also taken precautionary measures on the outbreak of the coronavirus and does not foresee any negative implications on 2020 business. Fluence Corporation Limited is on track to reach a tipping point where customers value the company’s competencies and competitive advantages. On TTM basis, the stock is trading at an EV/Sales multiple of 2.4x, lower than the industry average (industrials) of 17.8x. Considering the trading levels, improvement in key margins, growth opportunities and decent financial performance, we recommend a “Speculative Buy” rating on the stock at the current market price of $0.350, up by 2.941% on 14th February 2020.
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FLC Daily Technical Chart (Source: Thomson Reuters)
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