Fluence Corporation Ltd.  

FLC Details

Fluence Corporation Ltd. (ASX: FLC) provides pre-engineered water, wastewater treatment, and reuse solutions for municipal and industrial applications covering China, the Middle East, Southeast Asia, and North America markets. FLC operates in segments, namely, Operating Units (OUs) and Product and Innovation Group (P&I).

Material Business Updates: FLC appointed Richard Cisterna as Chief Strategy Officer effective on December 13, 2021. As per the update on December 10, 2021, the company secured an additional US$10 million under its debt facility with Upwell Water LLC. The total proceeds under of facility of US$30 million will be used to finance recurring revenue projects. On November 12, 2021, FLC received its first volume contract for packaged plants to treat wastewater from a new partner, Yangzhou Yijian Group Co. Ltd. in China.

Q3FY21 Highlights:

• Revenue surged 46% to US$20 million in Q3FY21 over PcP. It had sold 290 MABR plants so far with the capacity to treat wastewater for 900,000 people worldwide.
• FLC has a strong backlog of over US$158.5 million with Smart Product Solutions (SPS) showing momentum with a backlog at US$16.2 million.
• Year-to-date bookings at SPS stood at US$27.1 million of which US$11.3 million is expected to be recognized in FY21.
• FLC able to contain costs with operating expenses declined by 14% over the last year. This helped to narrow down its operating cash outflows to US$2.0 million, as compared to outflows of US$5.9 million posted last year.
• It had closed the period with a cash balance of US$16.3 million and liquid investments of US$35.7 million.

Projects and Progress:

The company recently announced a Cambodia contract for US$8.5 million. When completed, this will be the largest operator of the MABR plant worldwide by capacity. During the quarter, FLC realized the first sales of the MABR plant in Dubai and St. Lucia. It had signed a Joint Development Agreement with Beijing Enterprises Water Group Investment Limited to focus on optimizing Aspiral MABR plants.

Increase in Cash & Equivalent (Source: Analysis by Kalkine Group)

Key Risks: The wastewater treatment business is highly regulated. The company is exposed to forex volatility risks as it derives revenues from worldwide customers. Delay in project execution may outrun the costs and influence the cash flows. A slowdown in industrialization on the backdrop of increasing virus spread may affect the project pipeline and alter revenue realization.

Outlook: FLC is optimistic about its SPS business and reaffirms SPS sales in the range of US$35-50 million and positive underlying EBITDA for FY21. On MABR, FLC is focused on strengthening the businesses in China and Southeast Asia. It plans to launch NIROBOX desalination solutions in the Middle East and Southeast Asia. In addition, FLC aims to strengthen its recurring revenue model in the USA and Caribbean.

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

Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last six months, the stock has corrected by ~24.39%. FLC just recovered from its 52-week low price of A$0.150. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation and arrived at a target price with an upside of low double-digit (in percentage terms). The company can trade at a slight discount to its peers, considering the operating cash outflows in Q3FY21 and spreading the risk of the new virus variant may affect industrialization and may delay projects in the pipeline. For the valuation purpose, peers such as Service Stream Ltd. (ASX: SSM), Lycopodium Ltd. (ASX: LYL), CIMIC Group Ltd. (ASX: CIM), and others have been considered. Considering the order backlogs, healthy sales growth in Q3FY21, international expansion of its MABR business, upside indicated by the valuation, and key associated business risks, we recommend a “Speculative Buy” rating on the stock at the closing market price of $0.155 as on 23 December 2021.

FLC Daily Technical Chart, Data Source: REFINITIV 

Decmil Group Ltd.

DCG Details

Decmil Group Ltd. (ASX: DCG) provides engineering, construction, and maintenance services to resources, energy, and infrastructure sectors in Australia. The company operates in Construction and Engineering and Accommodation segments.

Project Update and Contract Wins:

• Regulatory testing at its Sunraysia solar farm has been completed and the company is now progressing towards Performance Testing. The Substantial Completion phase of the project is slated to be over before 31^st January 2022.
• As per the operational updates released on November 10, 2021, DCG secured contracts totaling $40 million in Western Australia and Queensland with $25 million for the Albany Ring Road project. It should be noted that the company has a contract on hand worth $445 million secured so far in FY22.
• As per the announcement on September 17, 2021, DCG secured $88.2 million contract from Major Road Projects Victoria for the upgrade work between Barwon Road and Settlement Road. DCG to commence The Work Package 1 immediately and is expected to be finalized in 2023.
• On September 1, 2021, DCG secured a contract of $28.2 million from Roy Hill-Munjilna Road. The project is slated to be completed by mid-2022.

A Sneak Peek at FY21 Results:

• It had completed Yandin and Warradarge Wind farm projects that were valued at $151 million during the year. Its normalized revenues dropped by 31% to reach $313.4 million in FY21. This is mainly due to the reduced order book at the start of the reporting period.
• It had posted normalized EBITDA of $7.6 million as compared to an EBITDA loss of $42.3 million in PcP owing to the reduction in overheads.
• Reported net losses narrowed from $95.7 million in FY20 to $11.5 million in FY21. It had closed the period with a cash balance of $9.7 million.

An Uptrend in Current Ratio (Source: Analysis by Kalkine Group)

Key Risks: Delay in project execution may derail the cash flows and strain the balance sheet. Dearth in infrastructure spending by the government may affect the order backlogs. Rising inflation, shortage of labour, lockdown worries, and fears of rising interest rates across the globe are some of the near-term headwinds.

Outlook: DCG has a project pipeline of over $46 billion in the core sector. It is targeting growth potential in Hydrogen and Lithium infrastructure projects as well as water and defence projects. DCG has projects worth $540 million to FY24. FFI and Gladstone Water Pipeline projects will see an uptick in occupancy rates. The management is optimistic about revenue growth in FY22 reaching over $445 million.

Stock Recommendation: Over the last six months, the stock has corrected by ~31.18%. DCG just recovered from its 52-week low price of A$0.310. On a TTM basis, the stock has been valued at 0.3x using EV/Sales multiple as compared to the industry median of 2.0x (Industrials). This signifies that the stock is undervalued at current levels. Considering the strong pipeline till FY24, ongoing developments in its Solar Farm project, decent cash balance, valuation on a TTM basis, and key associated business risks, we recommend a “Speculative Buy” rating on the stock at the closing market price of $0.320, down by ~1.539% as on 23 December 2021.

DCG Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and is subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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