Stocks’ Details

Fluence Corporation Limited 

Contracts in Multiple Geographies: Fluence Corporation Limited (ASX: FLC) provides decentralised water, wastewater, and reuse treatment services with its Smart Products Solutions, including Aspiral™, NIROBOX™ and SUBRE. The market capitalisation of the company stood at $128.1 Mn as on 7^th September 2020. For 1H FY20, the company reported total operating revenues amounting to US$57.6 million, reflecting YoY growth of 142%. Recurring revenue for the period amounted to US$3.9 million. For the same period, SG&A went down by 25% as compared to 1H FY19. The company witnessed improvement in sales of Smart Products Solutions, which was supported by its strategies in 1HFY20. In addition, the company managed to deliver 28 MABR products in China while continuing to grow sales via a strategic partnership.

In another update, the company stated that it has won a contract for the first Aspiral™ system in South Africa with a total value of around US$250,000. During the quarter ended 30^th June 2020 (Q2 FY20), the company secured contracts in multiple geographies, which include Argentina, Jamaica, Ghana, Vietnam, and Ethiopia. During Q2 FY20, the total recurring revenue stood at US$0.9 million. The company reported positive cash flow during the period, which include net operating cashflow of US$2.7 million, on the back of continued focus on streamlined operations and timely collections.

Receipts and Expenditures (Source: Company Reports)

Guidance for FY20: The company stated that the business is running well to achieve EBITDA profitability in FY20. FLC expects to report SPS sales of US$32 million and recurring revenue of US$9 million in FY20. 

Key Risks: The company’s business activities are sensitive to numerous financial risks such as market risk (including currency risk, interest rate risk and price risk), credit risk and liquidity risk. Market risk arises from the fluctuation in market prices and credit risk arises on the default by counterparties on their contractual obligations.

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

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

Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: On 28^th July 2020, the company inked a non-dilutive debt facility of US$20 million with Upwell Water. The company intends to utilise the proceeds from the facility for the general working capital purposes as well as to replace its current project loan facility with Generate Capital. As on 30^th June 2020, the cash balance of the company stood at US$20.1 million. On the technical analysis front, the stock of the company has a support level of ~A$0.187 and a resistance level of ~A$0.301. We have valued the stock using Price to Sales multiple based valuation method and arrived at a target price of low double-digit (in percentage terms). For the purpose, we have taken peers such as Intega Group Ltd (ASX: ITG), and Cardno Ltd (ASX: CDD) to name few. Thus, considering the recent contracts in multiple geographies, growth in revenue, positive EBITDA and key risks associated with the business, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.205 per share, with no change on 7^th September 2020.

Millennium Services Group Limited 

Growth in Gross Margin: Millennium Services Group Limited (ASX: MIL) is engaged in the provisioning of cleaning, security, and integrated services to retail and commercial centres. The market capitalisation of the company stood at $15.62 Mn as on 7^th September 2020. For FY20, the company reported a rise of $24.7 million in statutory EBITDA to $20.3 million. Gross profit for the period amounted to $30.8 million against $30.1 million in FY19. MIL recorded revenue of $122.2 million, as compared to $135.1 million reported in FY19, owing COVID-19 impacts. The company’s investment in new technology and people are delivering better controls and opportunities for growth.

In a recent business update, the company stated that it possesses a long-term contract book of $850 million. During the Q3 FY20, the company, the company’s revenues were impacted by temporary service reductions from customers. The company has been providing rapid and ongoing responses in Australia and New Zealand to current and new clients, mainly for cleaning services. This trend is likely to continue into FY21. During 1H FY20, the company experienced a decline of 12.1% in revenue due to loss of AMP contract in Feb 2019. Gross margin for the half-year moved by 15.1% to 11.8% due to ongoing profit improvement strategy and improved labour management controls.

Revenue & Gross Profit (Source: Company Reports)

Key Growth Strategies: The company is well-placed to maximise on opportunities created by the COVID-19 crisis driven by factors like higher levels of hygiene standards, and social distancing measures which would provide increased security opportunities. The company has scheduled to conduct its Annual Shareholders Meeting on 26^th November 2020

Key Risks: The company is mainly exposed to credit risk, which arises from cash and cash equivalents, contractual cash flows of debt investments carried at amortised cost. In addition, the business is also sensitive to liquidity risk, which is influenced by the inability of the company to pay its short-term obligations.

Stock Recommendation: Gross margin and EBITDA margin of the company stood at 86.9% and 2.4% in 1H FY20, reflecting YoY growth of 2.8% and 6.2%, respectively.  MIL has EV/Sales multiple of 0.2x as compared to the industry median (Professional & Commercial Services) of 2.7x on TTM basis. On the technical analysis front, the stock of the company has a support level of ~A$0.182 and a resistance level of ~A$0.462.  Thus, in light of the long-term contract book of $850 million, growth in gross profit, decent outlook and valuation on TTM basis, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.340 per share on 7^th September 2020.

Magnetite Mines Limited 

Rights Issue for Accelerating PFS Study: Magnetite Mines Limited (ASX: MGT) is engaged in the exploration of iron ore and uranium. The market capitalisation of the company stood at $33.92 Mn as on 7^th September 2020. Recently, the company announced that it is intending to raise around $5.65 million (before costs) through a 1 for 4 renounceable rights issue at an issue price of 1 cent per share. The issue price reflects a discount of 29% to the last close of 1.4 cents and 27% to the 10-day VWAP of 1.36 cents. The company added that the rights issue is partially underwritten to $4 million by Lead Manager and Underwriter Mahe Capital Pty Ltd. The proceeds raised from the rights issue are likely to be utilised for accelerating pre-feasibility study work on its flagship Razorback Iron Project.

Key Events for Rights Issue (Source: Company Reports)

Capital Raising in the Last Quarter: During Q4 FY20, the company has raised around $857,637 (before costs) through a renounceable pro-rata rights issue. The company witnessed robust support from the directors, existing shareholders, and new investors. In addition, MGT raised a further $75,000 (before costs) via an additional private placement.

Outlook: Magnetite Mines Limited believes that the combined application of selective mining and ore-sorting technology to its project offers the potential to deliver much higher iron ore grade. MGT has scheduled to conduct its Annual Shareholders Meeting on 27^th November 2020

Key Risks:  The company’s financial and operational performance could be impacted by the rising market share of competitors.

Stock Recommendation: The company is focused on high-grade low impurity products. The company reported cash and equivalents of $0.32 million in 1H FY20, while total debt for the period stood at $1.98 million. Debt to equity of the company stood at 0.27x in 1H FY20 against the industry median of 0.21x.  The stock of MGT has moved up by 400% and 650% in the last one and three months, respectively. As a result, the stock is inclined towards its 52-week high level of $0.020. In addition, the stock is trading at a price to book value multiple of 4.6x as compared to the industry median (Metals & Mining) of 2.4x on TTM basis. On the technical analysis front, the stock of the company has a support level of ~A$0.013 and a resistance level of ~A$0.031.  Hence, considering the current trading levels, upside movement in the stock within past months and a high leveraged balance sheet, we give an “Expensive” rating on the stock at the current market price of $0.019 per share, up by 26.667% on 7^th September 2020 owing to release of right issue. We further suggest investors to wait for better entry levels. 

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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