Company Overview: Fluence Corporation Limited (ASX: FLC) is one of the global leaders in the decentralized water, wastewater, and reuse treatment markets. It offers pre-engineered, standardized Smart Products Solutions, including Aspiral™, NIROBOX™ and SUBRE. The company also provides an integrated range of services across the complete water cycle to support and optimize water-related assets and other recurring revenue solutions. FLC has established operations in North America, South America, the Middle East, Europe, and China, and has an experience of operating in over 70 countries worldwide.

FLC Details



Long-Term Revenue Streams and Reduction in Overhead Costs: Fluence Corporation Limited (ASX: FLC) is the global leader in the delivery of innovative, cost-effective decentralized water, wastewater, and reuse solutions for business and communities anywhere in the world. As on 12 June 2020, the market capitalization of the company stood at ~$168.71 million. The company is well-positioned to serve the fastest-growing markets across the water cycle. During FY19, FLC managed to achieve several significant milestones and signed the Ivory Coast water treatment plant contract for €165 million. It also received additional orders from ITEST for Aspiral^TM Membrane Aerated Biofilm Reactor (MABR) Smart Products Solutions (SPS) and established new partnerships with Aerospace Kaitian Environmental Technology and Liaoning Huahong New Energy. During the year, the company successfully raised $38.3 million via oversubscribed private placement and SPP. This will help the company to increase assembly capacity in China, working with local partners and provide general working capital.

During the year, revenue of the company stood at US$61.3 million following a strong 2018 of more than US$101.1 million. The reduction was due mainly to delays in revenue recognition for the Ivory Coast water treatment project. FLC finished FY19 with total contract backlog of US$265 million, and SPS (Smart Products Solutions) sales exceeded its revised guidance and stood at US$26.5 million, reflecting a growth of ~21% over 2018. FLC continued to win contracts with major clients, including Beijing China Rail and The Three Gorges Group, as well as its three existing strategic partnerships. In the same time span, the company witnessed a continued reduction in overhead costs and reported total costs of US$33.9 million, down from US$40.7 million in FY18. This reflects the continuous shift of the company towards pre-engineered Smart Products Solutions, which requires lower headcount and other overheads.

FLC has expanded its presence with 38 partnerships in China, up from 26 in 2018. It is focusing on establishing a higher margin in the medium term, with more reliable longer-term revenue streams with lower capital intensity. The company is well-positioned for growth. Given the strong footprint in China, FLC is anticipating similar volume/bulk agreements in the upcoming years. As the increasing water scarcity is becoming the greater risk, the company is expecting strong fundamentals for its water treatment solutions. It is exploring partnership and sales channel opportunities for NIROBOX^TM and is implementing its strategy to be a global leader in decentralized water, wastewater, and reuse treatment markets.

Growth in Revenue (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 26.47%.


Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Well Management of Costs and Shareholders Capital: Over the span of 4 years, gross margin of the company witnessed a substantial improvement and stood at 16%. In the same time span, EBITDA margin and net margin of the company saw a significant improvement. This indicates that the company is managing its costs well and is capable of converting its revenue into profits. During FY19, Return on Equity of the company witnessed an improvement over the previous year, indicating that the company is well managing the capital of its shareholders and is capable of generating profits internally. In the same time span, current ratio of the company was broadly in line with the previous year and stood at 1.21x. During FY19, Assets/Equity Ratio was 2.92x, and Debt/Equity Ratio of the company stood at 0.23x.


Key Margins (Source: Refinitiv, Thomson Reuters)

Increased Traction for Sales Order and Sustainable EBITDA Profitability: During the first quarter of FY20, revenue of the company stood at US$47.3 million, and gross bookings of the company were US$12.5 million. The company reported a total contract backlog of US$228.0 million, which is inclusive of US$147 million related to the Ivory Coast Project. Despite the global health challenges and economic disruptions, the company achieved a significant milestone of positive EBITDA. In the same time span, delays in cash collections on some projects due to COVID-19 resulted in a higher net operating cash outflow of ~US$7.9 million. New sales orders for SPS continued to gain traction during the first quarter of 2020, with an increase of 60% in total orders, which stood at US$8 million. At the end of the quarter, the company reported a cash balance of ~US$16.9 million. In the same time span, the company reported financial close on the €165 million Ivory Coast project. It completed engineering design steps of the project and is now focused on moving towards construction of this important turnkey water treatment plant.


Quarterly Receipts and Expenditures (Source: Company Reports)

Strategic Sale in China of Aspiral to Three Gorges Group: The company has sold its first Aspiral^TM System to Three Gorges Group for the Great Protection of Yangtze River and general contractor China Tiesiju Civil Engineering Group. This represents the initial step of a potential long-term strategic partnership with Three Gorges. The initial Aspiral™ S1 unit incorporates MABR technology to treat 30 m³/day of wastewater and is valued at ~US$70,000. 

Impact of COVID-19: The current COVID-19 crisis presents the world with an unprecedented pandemic and tremendous economic disruption. FLC has closely monitored the developments of COVID-19 and is working efficiently in all locations across the globe to minimize interruptions in customer support and product supply. The company is focusing on executing its projects, ensuring reliable aftermarket services. In some geographic segments, new order bookings have slowed down. However, the situation has improved and is steadily moving back to normal. Unlike many of its peers, it has sustained growth in recurring revenue and EBITDA profitability.

Outlook for Continued Growth in 2020: The company has re-affirmed its guidance for FY20 and expects SPS revenue of at least US$32.0 million and recurring revenue of US$9.0 million. It also expects to see some of its 1H20 revenue shift to the second half of the year. FLC is likely to see continued strong growth of Smart Products Solutions and is aiming to convert initial strategic orders in China into bulk order agreements. The company is likely to remain EBITDA positive in FY20 and is expecting to increase its recurring revenue with project finance contracts & aftermarket services. The outbreak of COVID-19 is highlighting the fundamental need for safe water supply, and hence, FLC is strengthening its position as a leader in the global decentralized water and wastewater segment.

FLC is seeing the benefits of being globally diversified, with the ability to rapidly adapt to changing economic demand. The company has also fast-tracked the reduction in overhead costs and is working on improving its operating efficiency. With continued strong growth in SPS segment, the company is likely to sign additional commitments from new partnerships.


Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

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

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: As per ASX, the stock of FLC is trading close to its 52-weeks’ low levels of $0.235, proffering a decent opportunity for the investors to enter the market. It is well placed to navigate through the unprecedented times from COVID-19 crisis. The manufacturing facilities of the company are mostly operational, and it is working to meet its FY20 revenue forecasts. The company is also witnessing the benefits of being geographically diversified with several supply sources available in different countries. We have valued the stock using EV/Sales multiple based illustrative relative valuation approach and have arrived at a target price, offering an upside of lower double-digit (in percentage terms). Considering the attractive trading levels, decent financial position despite the breakout of COVID-19, diversified customer base, positive outlook, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.285, up by 5.556% on 12 June 2020. 

 
FLC Daily Technical Chart (Source: Thomson Reuters)

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