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

Fluence Corporation Ltd (ASX: FLC) offers packaged water and wastewater treatment solutions in many countries, that include North America, the Middle East, Europe, and China. The services are essential to complete water cycle from evaluation, delivery, to optimization of related assets. The group is expected to witness potential from Build Own and Operate projects and other latest contractual projects that will add significantly to the top-line of the group beginning next 1-2 years. The funding support now seems strong and the group is aiming to leverage opportunities across multiple geographies. The group has a decent market opportunity given the water crisis situation.
 

Target Market (Source: Company Reports)

Signed a contract with partner Hunan Aerospace Kaitian Environmental Technology Company Ltd.: The company has lately signed a contract with Hunan Aerospace Kaitian Environmental Technology Company Ltd. (Kaitian Environmental), for the  delivery of an Aspiral Smart Packaged wastewater treatment plant to the Yiyang City Government. The move is under a three-party agreement. After the successful operation of three pilot sites, FLC’s Aspiral wastewater treatment technology has got the support of the Yiyang City Government to meet its planning for the future requirements of the Chinese Government’s 13^th five-year plan. This project has to be complied by 2020. The plant will include four Smart Packaged Aspiral L4 units, and will be used by the Xielingang Township government, and will treat 800 m3/day of wastewater to Class 1A standards. This is scheduled to be commissioned as early as January 2019 and will be the largest capacity Aspiral plant in Hunan Province. The company is already looking to expand its presence in China. Despite the positive news, FLC stock fell 2.78% on December 13, 2018.

Secured Rights to Construct Build-Own-Operate Plant in Peru: FLC has bagged the rights to develop and operate a seawater desalination plant in Peru. The contract includes a Water Purchase Agreement (WPA) for a term of about 10 years, as signed with a client. This plant will be operating through the use of NIROBOX Smart Packaged units, as manufactured by FLC. The company will initially deploy five NIROBOX SW-XL units, then it will be ultimately expected to expand to 10 NIROBOX SW-XL units. These have been anticipated to be shipped before the end of 2018. The preliminary investment of about US $8.4 million has been indicated for the plant and this can deliver at least 1 million cubic meters of industrial-grade water on a yearly basis. FLC expects this plant to be operational by the end of the second quarter of 2019. The initial annual revenue from WPA is expected to be around US $1.7 million for the company. Currently, the negotiations are underway for water purchase agreements with more industrial customers. The group can benefit from additional agreements of purchase of water based on off-take arrangements and these can enhance annual recurring revenue up to about US $5.0 million. This figure is estimated based on full plant capacity. Overall, the project will set an important step in increasing the recurring revenues.

Secured US$50 million Build, Own, Operate & Transfer project financing facility: FLC has bagged a non-recourse debt facility of about US $50 million for financing its Build, Own, Operate & Transfer (BOOT) projects across the globe. Particularly, a US-based sustainable infrastructure investment firm has been behind this given its experience in financing infrastructure and renewable energy projects. This facility will be available to FLC over a period of 3 years and on a project-by-project basis for BOOT projects. Overall, FLC is now in a better position to cater to project finance contracts; and thus can support future projects for generating a recurring revenue.

Raised Funds: Lately, FLC has successfully raised $3.3 million from 393 eligible shareholders through Share Purchase Plan (SPP) and overall raised the total amount from the recent share placement and the SPP of $36.5 million. However, the issue price of $0.37 per share is a discount to the 15 day VWAP prior to the trading halt noted in October 2018. The funds have been indicated to be directed towards growth of the equity component of BOOT projects, business in China for MABR and SUBRE based sales, and general working capital for the business. Moreover, FLC has attained support from many US based investors and seems to gain more traction in terms of interest in North American zone. Keeping the global strategy in mind, FLC aims to undertake dual listing in North America in the next one year or so.

Major Projects that are in pipeline: The group has flagged some key projects that include San Quintin, Mexico project construction that has started in the third quarter 2018, after the Supreme Court of Mexico cleared the final legal hurdle and has unanimously approved the construction. The revenue will be recognized in next 2 years of expected plant construction; and the company can generate an average of US $10 million recurring annual billings for 30 years after the initiation of operation. For 2018 revenue recognition, PDVSA project in Venezuela is on track and is in line with the company’s expectations. US $3.5 million EPC contract will cater to expansion of capacity for the power plant in Argentina. Moreover, other projects that are in pipeline comprise of the First Aspiral Project in the Philippines consisting of two Aspiral Smart Packaged wastewater treatment units, which will assist in a residential development in Manila. Then the other projects entail the first Aspiral sale in the USA to Water Fleet planned to be designed and commissioned by January 2019 and the first sale of MABR modules to Orenco, which is a large system integrator in the USA. The company is undergoing negotiations with African government for the large scale water treatment plant. Additionally, there are three NIROBOX Smart Packaged desalination plants scheduled to be delivered in the fourth quarter of 2018 for US$7.6 million to a customer in Egypt. The contract also comprises of an operating and maintenance contract, which will provide recurring revenues to the company.

First positive quarter of EBITDA - Third Quarter 2018: During the third quarter of 2018, the company has delivered the first EBITDA positive of US$0.5 million (unaudited). There was a 140% increase in the revenue to US$29.0 million. The company’s Contract revenue backlog stood at US$80.3 million as on 20 October 2018.

China growth strategy: At the end of the September quarter 2018, FLC had relationships with 23 local partners covering 14 provinces.


Stats on China growth strategy (Source: Company Reports)

Decent Outlook: For FY 18, FLC expects to achieve the revenue of US$95M. The company aims to touch a target of US $105 million based on additional revenue from sales pipeline and activities. FLC expects to post gross margin of $22-$25m for FY 18 and is also targeting at least one profitable quarter for FY 19. An additional US$33.2 million of the current US$80.3 million contract backlog is expected to be turned to sales revenue in the fourth quarter of 2018. The mix of contracts in year 2018 will help the gross profit for FY 18 to be between US $22 million to US $25 million. This includes the construction phase of the large San Quintin, Mexico project. Further, the company expects recurring revenue from increasing BOOT projects and O&M contracts. Moreover, for the fourth quarter of FY 18, FLC expects US$17.4 million of cash inflows from customers and a net operating cash outflow of $16.5 million. This amount shows the projected, significantly accelerated growth in revenue in the fourth quarter, which is a new expected BOOT contract and the expected working capital requirements in China. Discussions on project debt facility with regards to funding key business opportunities are underway; and the fourth quarter of FY 18, is expected to witness inflows excluding receipts from PDVSA and receipts from San Quintin. The group has stated that the receipts for the latter case are associated with first cash disbursement in 1Q of 2019 for revenues recognised in year 2018. Therefore, the cash used in operating activities is expected to decline significantly in Q1 2019 due to the collection of the outstanding 2018 receivables and the completion of the Portuguesa contract with PDVSA; and this will continue in the following few quarters as well.

Investment Potential (Source: Company Reports)

Stock Recommendation: FLC stock has fallen 12.5% in three months as on December 12, 2018. The company’s stock is trading at A$0.35 and has an immediate support at $0.33 and resistance around $0.4 level. During the third quarter of 2018, the company has delivered the first EBITDA positive quarter. While short term volatility in price may be seen on the cards, but the group has the support structure and funding to manage key projects that will add to the revenue and profit line in next few years. Based on the foregoing, we give a “Speculative Buy” recommendation on the stock at the current price of $0.35.
 

FLC Daily Chart (Source: Thomson Reuters)

 
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