Company Profile: 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. This enables businesses and communities worldwide to maximize their water resources.

FLC Details


 
Continued 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 businesses and communities anywhere in the world. As on 1 May 2020, the market capitalization of the company stood at ~$174.96 million. The company is addressing global water challenges and provides uniquely compelling, pre-engineered, Smart Products Solutions. The company has a focus on shifting towards higher margin Smart Products Solutions and Recurring Revenue. During FY19, the company reported total revenue of US$60.9 million, wherein Custom Engineered Solutions generated 46% of revenue, followed by 43% from Smart Products Solutions and 11% from Recurring Revenue. In the same time span, the company witnessed a continued reduction in overhead costs and reported total costs of US$33.9million, 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. During the year, the company further strengthened its engagement and received follow-on orders from Aerospace Kaitian Environmental Technology and Hubei ITEST. Over the span of 2 years from FY17 to FY19, the company witnessed a CAGR of 35.88% in revenue and a CAGR of 27.8% in gross profit. This indicated low cost and enhanced existing large-scale water treatment infrastructure. For the quarter ended 31 December 2019, the company had gross bookings of US$25.4 million with a total backlog of US$265.0 million.

The company has recently released its results for the first quarter ended 31 March 2020, wherein it reported positive EBITDA. The COVID-19 crisis is highlighting the fundamental need for safe water supply and hygiene. The company is strengthening its position as a leader and is rapidly adapting to changing economic demand in individual regions.

Given the strong presence of the company in China from two major projects, the company is anticipating further similar volume/bulk agreements. As the increasing water scarcity becomes a greater risk, the company is expecting strong fundamentals for its water treatment solutions. It is exploring partnership and sales channel opportunities for NIROBOX^TM. It is implementing its strategy to be a global leader in decentralized water, wastewater and reuse treatment markets.


FY19 Financial Highlights (Source: Company Reports)

Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of Fluence Corporation Limited.


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 FY19. In the same time span, EBITDA margin and Net margin of the company also saw a significant improvement. The improvement in gross margin and an increase in EBITDA and net margin 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 managing the capital well 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 multiple was 2.92x, and Debt/Equity multiple of the company stood at 0.23x.


Key Margins (Source: Refinitiv, Thomson Reuters)

Strongly Positioned for Growth and Sustainable EBITDA Profitability: The company has recently released its results for the first quarter ended 31 March 2020, wherein it reported revenue of US$47.3 million and gross bookings of US$12.5 million, with total contract backlog of US$228.0 million as at 31 March 2020. This includes US$147.0 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 net operating cash outflow of approximately 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 to US$8 million. FLC reported a continued reduction in overhead costs with a decline of over 10% in SG&A expenses. At the end of the quarter, the company reported a cash balance of approximately US$16.9 million. During the quarter, 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 the construction of this important turnkey water treatment plant.  


Summary of Quarterly Receipts and Expenditures (Source: Company Reports)

Fluence Aspiral Sale in Inner Mongolia for China Rail: The company has entered a new strategic market segment with the sale of Aspiral^TM to Beijing China Railway Science New Technology Co. Ltd for a contract value of US$126,000. The company will use its MABR technology to treat an initial 35m³/day of highly concentrated wastewater. This contract will rapidly prove MABR’s effectiveness and will significantly contribute to the economic value proposition and meaningful bulk commitments.

Future Expectations and Growth Opportunities: The company has reaffirmed its FY2020 guidance wherein it expects Smart Products Solutions revenue of at least US$32.0 million, recurring revenue of US$9.0 million and sustained EBITDA profitability. Based on current contracts and the anticipated collections from the Ivory Coast Project, the company expects positive cash flows in the next quarter of FY20. 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. It anticipates increased longer-term demand for its safe, secure water and wastewater treatment solutions. The continued market penetration of the company’s MABR technology will result in meaningful bulk commitments and significant recognition in time.

Despite the unprecedented times, the manufacturing facilities of the company have largely been operating as normal, due to proactive steps taken by FLC. 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 the SPS segment, the company is likely to sign additional commitments from new partnerships. It is also expecting new opportunities for NIROBOX^TM.


Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

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


EV/Sales multiple based relative valuation (Source: Refinitiv, Thomson Reuters), *1 USD= ~1.55 AUD

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 accumulation. The company is well placed to navigate through the unprecedented times from COVID-19. The manufacturing facilities of the company are mostly operational, and it is significantly working to meet its FY20 revenue forecasts. It is also witnessing the benefits of being geographically diversified with several supply sources available in different countries. Considering the attractive trading levels, decent financial position despite the outbreak of COVID-19, diversified customer base and modest outlook, we have valued the stock using EV/Sales multiple based illustrative relative valuation approach and have arrived at a target price with an upside of lower double-digit (in percentage terms). Hence, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.285, up by 1.786% on 1 May 2020.
 
 
FLC Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer
 
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated websites are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.