Fluence Corporation Limited

FLC Details

Q3FY21 Highlights: Fluence Corporation Limited (ASX: FLC) is a leading player in the decentralised water, wastewater, and reuse treatment markets with a global presence in the Middle East, China, South-East Asia, and North America. 

• Revenue Growth: The company reported ~46% YoY revenue growth to ~US$20 million in Q3FY21. The revenue contribution from Smart Products Solutions (SPS) stands at ~US$7.4 million in Q3 FY2021, taking the YTD21 Smart Product Solutions (“SPS”) revenues to ~US$18.9 million.
• Decline in Operating Expenses: FLC recorded cost-out improvement and efficiency gains with ~14% YoY reduction in operating expenses in Q3FY21.
• SPS Order Backlog: The company has ~US$27.1 million SPS bookings for YTD21 and ~US$16.2 million current SPS backlog. Overall, FLC has a contracted backlog of US$158.5 million.
• Liquidity Position: FLC held ~US$16.3 million cash and cash equivalents as of 30 September 2021. It also held ~US$35.7 million in short and long-term liquid investments.

1HFY21 Key Takeaways:

• The SPS sales increased by 12% YoY in 1HFY21. It included commissioning and sales of a NIROBOX™ plant in Taiwan, commissioning an MABR plant in Cambodia, and sales of MABS plants in the US and Israel. The service revenue from continuing operations rose to US$3.5 million in 1HFY21 versus US$2.4 million in 1HFY20.
• FLC generated US$50.82 million receipts from customers in 1HFY21 versus US$29.93 million in 1HFY20.

Total Revenue & Net Income Trend from 2HFY19-1HFY21; (Analysis by Kalkine Group)

Key Risks: The company faces the COVID-19 impact with reduced meetings, delays in plant commissioning, and new orders. It faces forex rate, technological changes, and volatility in the overseas markets.

Outlook:

• The company has been witnessing the enforcement of higher standards of wastewater treatment by various countries and a continuous trend towards decentralized treatment. It, thereby, expects demand for its MABR (wastewater treatment) solution and desalination (Aspiral^TM & Nirobox^TM)
• The Company is strongly positioned for growth and reiterates guidance for SPS sales in the range of US$35 – $50 million and positive underlying EBITDA for FY2021.
• The company is continuing with its Ivory Coast water treatment Project and forecasts positive cashflows during the project. FLC expects to complete the project by Q2FY23.

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

Source: 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: The stock of FLC gave a negative return of ~12.19% in the past three months and a negative return of ~5.26% in the past six months. The stock is currently trading lower than the 52-weeks’ average price level band of $0.160 - $0.330. The stock has been valued using the Enterprise Value to Sales based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount than its peers’ average EV/Sales multiple, considering its higher debt-to-equity ratio in 1HFY21, decrease in liquidity position, foreign exchange volatility, and COVID-19 risk. For this purpose of valuation, few peers like Service Stream Limited (ASX: SSM), Monadelphous Group Limited (ASX: MND), Korvest Ltd (ASX: KOV), and others have been considered. Considering the current trading levels, revenue growth & improved net cash outflows in Q3FY21, SPS order book and contracted backlog, valuation, and associated key business risks, we give a ‘Speculative Buy’ rating on the stock at the closing price of $0.180, as of 1 November 2021.

FLC Daily Technical Chart, Data Source: REFINITIV 

Decmil Group Limited

DCG Details

FY21 Results: Decmil Group Limited (ASX: DCG) is an engineering and construction company providing a diverse range of services to the Resources and Infrastructure industries in Australia. As per a recent update, Thorney International Pty Limited increased its voting power from ~19.72% to ~20.96% in DCG.

• Reduced Overheads: The company reported reduced overheads of ~$26.4 million in FY21 compared to ~$41.2 million in FY20 owing to restructuring benefits.
• Improved Gross Margin: DCG reported an improved normalised gross margin of ~10.8% in FY21 versus ~-0.2% in FY20.
• Net Debt Position: The net debt position stood at ~$8.1 million as of 30 June 2021. The company raised ~$32 million via a ~$20 million subordinated debt facility and ~$12 million equity for new projects.
• Order Book: DCG held a contracted order book of ~$570 million as of 30 June 2021 out of which ~$400 million work in hand flowing into FY22.

Revenue & Net Income Trend from FY18-FY21; (Analysis by Kalkine Group)

Key Risks: The company faces the COVID-19 impact of contract delays, low occupancy, and ongoing litigation disputes with Southern Cross Electrical Engineering (SCEE) and Sunraysia Solar Farm Trust (SSF).

Outlook:

• The company will conduct its AGM on 11 November 2021.
• DCG expects ~$500 million revenue and ~8-9% gross margin for FY22 and beyond based on the gross margin projection from the high-margin and low-risk contracts from the customers across sectors.
• DCG expects considerable public sector infrastructure spending by the Government and robust commodity prices to create avenues in the Resources sector.
• The company is advancing on the sale process for Homeground Gladstone accommodation village because of the COVID-19 impact on the occupancy levels.

Stock Recommendation: The stock of DCG gave a negative return of ~11.42% in the past three months and a negative return of ~42.05% in the past six months. The stock is currently trading at par to its 52-weeks’ low-level of $0.310. On a TTM basis, the stock of DCG is trading at an EV/Sales value multiple of 0.3x lower than the industry (Industrials) median of 2.2x, thus seems undervalued. Considering the current trading levels, overhead reduction, positive normalised EBITDA generation, award of new projects in FY21, secured order book for FY22, & increased Infrastructure spending by the Government in FY22, valuation on a TTM basis, and associated key business risks, we give a ‘Speculative Buy’ rating on the stock at the closing price of $0.310, down by ~1.588%, as of 1 November 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 decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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 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.

Disclaimer - This report has been issued by Kalkine Pty Limited (ABN 34 154 808 312) (Australian financial services licence number 425376) (“Kalkine”) and prepared by Kalkine and its related bodies corporate authorised to provide general financial product advice. Kalkine.com.au and associated pages are published by Kalkine.

Any advice provided in this report is general advice only and does not take into account your objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your objectives, financial situation and needs before acting upon it.

There may be a Product Disclosure Statement, Information Statement or other offer document for the securities or other financial products referred to in Kalkine reports. You should obtain a copy of the relevant Product Disclosure Statement, Information Statement or offer document and consider the statement or document before making any decision about whether to acquire the security or product.

You should also seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice in this report or on the Kalkine website. Not all investments are appropriate for all people.

The information in this report and on the Kalkine website has been prepared from a wide variety of sources, which Kalkine, to the best of its knowledge and belief, considers accurate. Kalkine has made every effort to ensure the reliability of information contained in its reports, newsletters and websites. All information represents our views at the date of publication and may change without notice.

Kalkine does not guarantee the performance of, or returns on, any investment. To the extent permitted by law, Kalkine excludes all liability for any loss or damage arising from the use of this report, the Kalkine website and any information published on the Kalkine website (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine hereby limits its liability, to the extent permitted by law, to the resupply of services.

Please also read our Terms & Conditions and Financial Services Guide for further information.

On the date of publishing this report (referred to on the Kalkine website), employees and/or associates of Kalkine and its related entities do not hold interests in any of the securities or other financial products covered on the Kalkine website.

Kalkine Media Pty Ltd, an affiliate of Kalkine Pty Ltd, may have received, or be entitled to receive, financial consideration in connection with providing information about certain entity(s) covered on its website.