Company Overview: Fluence Corporation Limited (ASX: FLC) is one of the global leaders in the decentralized water, wastewater, and reuse treatment markets. The company operates mainly under three segments – Smart Products Solutions (water treatment solutions leveraging patented Membrane Aerated Biofilm Reactor (MABR) technology); Custom-Engineered Solutions (turn-key projects offering customised solutions); Recurring Revenue (works under build, own, operate and transfer business model). 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
Decent Rise in Revenues & Stable Balance Sheet to Aid Growth: Fluence Corporation Limited (ASX: FLC) is engaged in providing standardised, pre-engineered water and wastewater treatment solution which is focussed on the decentralized market. The market capitalisation of the company as on 15 January 2021, stood at ~$162.46 million. As per a recent update, FLC has received a second payment of ~US$38 million, on the completion of the preliminary engineering design phase of the Ivory Coast water treatment plant. The company now expects the project to be cash flow positive with the receipt of this payment.
The company has repositioned its strategy to mainly focus on MABR and Smart Products Solutions in China and Southeast Asia, NIROBOX desalination solutions in the Middle East and Southeast Asia, and the water treatment project in the Ivory Coast.
FLC delivered a strong top-line performance in the nine months to September in FY20. It reported an increase of 95% in operating revenues to US$72.9 million in the first nine months of FY20, from US$37.4 million during the previous corresponding period. Recurring revenue grew by 63% to US$5.7 million from BOOT and O&M contracts. There was a reduction in the SG&A expenses by ~22% in the same period. The company has secured a debt facility of US$20 million from Upwell Water LLC. Overall, the company reported positive cash-flow of US$4.3 million for the first nine months of FY20, and it maintained a cash balance of US$31.2 million as on September 30,2020.
YTD September 2020 Operating Revenue Performance (Source: Company Reports)
The Group has completed the conditions precedent for the Ivory Coast and received the notice-to-proceed.
Cash Flow positive in Q3FY20: During the quarter, the group reported a decent rise in revenue by 13% to US$15.6 million compared to pcp, and a rise of 50% when compared to Q2FY20. Gross booking during the period stood at US$7.5 million and there was a cash balance of US$31.2 million as on 30 September 2020. It remained cash flow positive at US$11.1 million during the quarter.
Sales Mix: The company reported a diversified revenue mix in FY19, with China, Argentina & Brazil together reporting ~48% of the sales by region. There was a balanced mix of sales from the Smart Product Solutions and Custom Engineered Solutions with a contribution of ~43% and ~45%, respectively. The demand in the industrial sector for its key products continues to be robust and forms 45% of the sales mix as of FY19.
Sales Mix as of FY19 (Source: Company Reports)
Higher Margins Driving Profitability: The company’s Smart Products Solutions (SPS) has a decent margin profile and is aiding the overall margin growth of FLC. Revenue share from the SPS segment has been increasing over the past couple of years and the company plans to achieve a sales contribution of 66% from this segment in the near future, which is significant growth from 22% in FY18.
Details of Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 53.16% of the total shareholding. RSL Investments Corporation is the largest shareholder in the company, with a percentage holding of 26.47%. Watermark Services, LLC Ltd. holds the second maximum interest in the company at 8.46%.
Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)
Key Metrics: The company reported decent margin growth in the first half of FY20. The gross margin increased to 32.5% in H1FY20 from 14.3% in H1FY19. EBITDA margin stood at 11% during the period and the company delivered a positive net margin of 3%, compared to a negative margin of 73.6% in H1FY19. There was an improvement in the ROE to 4.4% in H1FY20, from a negative 42.4% in the pcp. The company has witnessed an improvement in the liquidity position with a current ratio of 1.21x in H1FY20 from 1.04x in the previous corresponding period. Cash cycle of FLC improved to 238.3 days from 395.5 days during the same period. Total debt stood at ~US$3.74 million as on 30 June 2020. FLC maintained a decent balance sheet with a cash position of US$20.15 million during the same period end.
Key Margins (Source: Refinitiv, Thomson Reuters)
Key Risks: The company operates its business at a global level and has its presence across different parts of the world. As such its earnings are exposed to foreign currency fluctuations and might have a significant impact on the profitability of the company. Any adverse impact on the interest rates might impact FLC, as it will have a direct impact in the cash and equivalents held by the company. The outbreak of the COVID-19 pandemic had an impact on the business of the company as it reports a significant part of its revenue from China and other key pandemic impacted regions. It has witnessed slower new order bookings, less revenue recognition and experienced delays in the execution of the projects. FLC had also experienced the effect of the virus on its operations in Italy, which was one of the countries to be severely impacted by the COVID-19 pandemic.
Outlook: Despite the impact of the COVID-19 pandemic on its business, the company has reaffirmed its FY20 guidance. It expects sales from smart products solutions at US$32 million and recurring revenue at US$9 million during the year. FLC is anticipating to give profitability at an EBIDTA level in FY20. The company had a backlog of US$215 million including US$156 million in regard to the Ivory Coast Project, as on 30 September 2020. The Group has completed the conditions precedent for the Ivory Coast and received the notice-to-proceed.
Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)
Valuation Methodology: Price to Sales Based Market Multiple Valuation (Illustrative)
Price to 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: The company has a global footprint across key markets which helps it to leverage an optimal mix of sales channels. Its earnings are augmented by the decent margins from the smart products solutions, whereas BOOT and O&M contracts drive the recurring revenue. FLC gave a positive return of 21.95% in the past three months and a positive return of 6.38% in the past one month. As per ASX, the stock of FLC is trading below its average 52-weeks’ levels of $0.170-$0.445, proffering a decent opportunity for the investors to enter the stock. On a technical analysis front, it has a support level of ~$0.215 and a resistance level of ~$0.277. We have valued the stock using 1-year forward Price to Sales market multiple (discounted 2.5x from the five years’ average considering FLC’s business risks and exposure arising out of its presence in key markets around the world, which have been severely impacted by the COVID-19 pandemic) to FY21E consensus sales of ~US$148 million and have arrived at an indicative target price of lower double-digit growth (in % terms). Considering the current trading levels, decent increase in top-line, positive prospects on the Ivory Coast project, decent margin profile with good cash position, and key risk associated with the business, we give a ‘Speculative Buy’ recommendation on the stock at the current market price of $0.250, down by 3.847% as on 15 January 2021.
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FLC Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
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