Contrasting trends continue

Fluence Corporation 10 February 2020 Update
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Fluence Corporation

Contrasting trends continue

Q4 results

General industrials

10 February 2020

Price

A$0.35

Market cap

A$220m

A$1.468/US$

Estimated net cash (US$m), including short-term deposits, at end FY19

24

Shares in issue

620m

Free float

60%

Code

FLC

Primary exchange

ASX

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(20.2)

(18.4)

4.4

Rel (local)

(22.2)

(21.7)

(9.7)

52-week high/low

A$0.6

A$0.3

Business description

Fluence is a global supplier of water and wastewater treatment solutions. Its decentralised products provide municipal customers with ‘plug and play’ solutions that are quicker to deploy and substantially cheaper than traditional alternatives.

Next event

Q120 trading update

April 2020

Analysts

Dan Gardiner

+44 (0)20 3077 5700

Graeme Moyse

+44 (0)20 3077 5700

Fluence Corporation is a research client of Edison Investment Research Limited

The contrasting trends observed in Q3 continued into Q4. While Custom Engineering Solutions (CES) sales stalled, Smart Product Solutions (SPS) grew substantially (doubling q-o-q). Guidance for SPS to rise ‘at least’ 20% in FY20 appears prudent given current uncertainties over China. However, it probably understates the commercial progress made in the last six months. We trim our FY20 top-line forecast, but with financial closure on the Ivory Coast contract achieved, Fluence should still be EBITDA positive.

Year end

Revenue (US$m)

Adjusted EBITDA* (US$m)

EPS*
(c)

EV/revenue
(x)

EV/EBITDA
(x)

P/E
(x)

12/17

33.2

(23.6)

(7.0)

5.1

N/A

N/A

12/18

101.1

(8.5)

(2.5)

1.7

N/A

N/A

12/19e

60.0

(19.8)

(4.0)

2.8

N/A

N/A

12/20e

156.0

3.5

0.2

1.1

48.9

112.0

Note: *EBITDA/EPS exclude acquired intangibles amortisation, exceptionals and share-based payments.

CES struggles

Visibility on the timing of revenue recognition for CES contracts remains low. Financial closure on the Ivory Coast contract in January was too late for the US$20m initial payment to be recognised as revenue in Q419 and there were delays in Egypt and Brazil (we had assumed US$17m here). As a result of the CES shortfall, Q4 revenue was US$23.4m and free cash outflow was US$9.5m.

Further commercial traction in SPS

Fluence’s growth prospects and strategic value are primarily driven by its higher margin, proprietary SPS products. SPS sales doubled q-o-q to US$11.1m in Q4 reflecting continuing Aspiral demand in China. Commercial traction here remained healthy in Q4 with two follow-on orders adding to the framework deals delivered in Q3 (see update note). Our bottom-up analysis suggests Fluence has signed US$90m of business in China to date. FY20 SPS revenue guidance of ‘at least’ US$32m (20% yoy growth) is prudent given near-term uncertainties in China, but the long-term commercial opportunity remains significant, in our view.

EBITDA positive forecast retained for FY20

Reflecting CES revenue recognition uncertainties and new recurring revenue and SPS guidance, we lower our FY20 sales estimate by 11% to US$156m. With a US$265m backlog (c US$180m of which is due to be recognised in FY20) this could be achieved without signing new deals, in our view. This revenue base should be sufficient to reach positive EBITDA; while further scale is needed to achieve positive cash flow Fluence should be close by Q420. We forecast cash burn of US$14m in FY20 and year-end gross cash of US$13m including short-term cash deposits.

Valuation: Long-term prospects justify upside

In our view, Fluence’s value is primarily underpinned by the prospects for its proprietary SPS products. Recent wins in China demonstrate its solutions are gaining traction even if the near-term outlook is cloudy. Our DCF-based valuation, which reflects this long-term potential, falls to A$0.57/share (from A$0.62/share) on lower forecasts but still implies 63% upside to the current price.

Prospects in China, changes to forecasts and cash flow

Previous notes (eg Time for better treatment?) have highlighted both the strategic importance of Fluence’s SPS division and the long-term growth opportunity presented by China in particular. Over the last six months the company has bolstered its original bulk deal with ITEST in China by signing two new framework deals: with Kaitian in Hunan province and with Liaoning Huahong New Energy in Liaoning Province (see China Contract catalyst, Further progress in China and Contrasting trends). In Q4 it secured further follow-on Aspiral deals with Kaitian and ITEST. Combined, we estimate these contracts alone will generate revenues of US$90m, a large proportion of which could be recognised in FY20 (see Exhibit 1). This estimate of SPS revenue only includes contracts already announced. Fluence’s existing Changzhou manufacturing facility (it is also establishing production in Yiyang and now Panjin) has the potential to generate over US$75m in sales at full capacity. 

Exhibit 1: Estimated value of announced Aspiral deals in China

Announced deals

Date

Location

Contract value

Potential timing (US$)

Capacity (m3/day)

US$m

FY19

FY20

FY21

ITEST

Oct-18

Hubei

66,000

45

18

10

17

Kaitian

Sep-19

Hunan

40,000

18

9

9

Liaoning

Sep-19

Panjin City

52,000

23

1

10

12

Kaitian (Anhui)

Dec-19

Hunan

8,100

4

2

2

Total

166,100

90

19

31

41

Source: Fluence announcements, Edison Investment Research

Nevertheless, Fluence’s guidance for SPS sales to grow at least 20% to US$32m in FY20 appears prudent at this stage. ITEST is based in Hubei province, which is at the centre of the current 2019-nCoV (coronavirus) outbreak. Sales in China were US$7.8m in Q419, 70% of SPS revenue and a third of the company total. While Fluence reports that it has seen no impact on its staff or business currently, given the severity of the measures imposed by the government to control the outbreak, a near-term impact on the supply chain or customer in the future would not be a surprise. While any impact is likely to prove temporary, we lower our SPS FY20 revenue forecast to US$32m to reflect company guidance and this risk.

Acknowledging the difficulties in predicting the timing of revenue recognition, we forecast US$115m of CES sales in FY20. We estimate the company has already signed deals scheduled to generate over US$130m in CES revenue in FY20 (Ivory Coast = US$100m, San Quintin = US$18m plus Egypt and Brazil) and could sign additional deals. However, recognising the potential for further unforeseen delays, we opt not to give full value to this pipeline at this point. Adding our CES forecast to company guidance on recurring revenue sales (US$9m) and our SPS forecasts suggests revenue of US$156m in FY20. This represents 59% of the current (US$265m) backlog but is substantially below the US$180m the company expects to recognise in FY20. It is down 11% from our previous forecast (see Exhibit 2).

Exhibit 2: Changes to forecasts

US$m

FY19e*

FY20e

Old

New

% change

Old

New

% change

Revenue

– CES

62.0

26.5

(57.3)

124.9

115.0

(7.9)

– SPS

26.0

26.5

1.9

47.0

32.0

(31.9)

– Recurring

2.0

7.0

250.0

4.0

9.0

125.0

Total

90.0

60.0

(33.3)

175.9

156.0

(11.3)

Adjusted EBITDA

(21.8)

(19.8)

N/A

1.9

3.5

83.2

Adjusted EPS (c)

(4.4)

(4.0)

N/A

(0.1)

0.2

N/A

Gross cash (including short-term deposits)

26.9

13.0

Net cash (including short-term deposits)

24.0

9.7

Source: Edison Investment Research. Note: *Company has stated FY19 total revenue, divisional split and gross cash. All other numbers remain estimates.

Gross cash stood at US$26.9m at the end of Q4 (including US$5m of short-term deposits), reflecting the US$25m net increase from the capital raising in October. The lack of CES revenue in Q4 saw cash consumption increase to US$9.5m but the burn rate should slow steadily in FY20. We assume cash consumption of US$6.5m in Q1 (based on company guidance for operating cash flow plus capex) and some cash payment from the Ivory Coast contract in Q2. The timing of payments will be critical, but the underlying trajectory should reassure investors that Fluence can reach cash flow break-even. We forecast cash consumption of US$14m (net cash flow) in FY20, with gross cash (including short-term deposits) at year end of US$13m (see Exhibit 3).

Exhibit 3: Reducing cash burn (free cash flow)

Source: Fluence data, Edison Investment Research

Exhibit 4: Financial summary

US$m

2016

2017

2018

2019e

2020e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

0.8

33.2

101.1

60.0

156.0

Cost of Sales

(2.0)

(27.2)

(66.5)

(42.0)

(114.7)

Gross Profit

(1.2)

6.0

34.6

18.0

41.3

Adj. EBITDA

 

 

(8.8)

(23.6)

(8.5)

(19.8)

3.5

Operating Profit (before amort. and except).

 

(9.1)

(24.3)

(11.0)

(10.1)

(22.4)

Amortisation of acquired intangibles

0.0

0.0

0.0

0.0

0.0

Exceptionals

0.1

(1.2)

(52.7)

0.0

0.0

Share-based payments

0.0

0.0

0.0

0.0

0.0

Reported operating profit

(9.1)

(25.4)

(63.7)

(22.4)

0.9

Net Interest

(0.0)

2.6

0.5

0.5

0.4

Joint ventures & associates (post tax)

0.0

0.0

0.0

0.0

0.0

Exceptionals

0.0

0.0

0.0

0.0

0.0

Profit Before Tax (norm)

 

 

(9.1)

(21.7)

(10.5)

(22.0)

1.3

Profit Before Tax (reported)

 

 

(9.1)

(22.9)

(63.2)

(22.0)

1.3

Reported tax

0.0

(0.7)

(0.4)

0.0

0.0

Profit After Tax (norm)

(9.1)

(22.4)

(10.9)

(22.0)

1.3

Profit After Tax (reported)

(9.1)

(23.6)

(63.6)

(22.0)

1.3

Minority interests

0

0

0

0

0

Discontinued operations

0

0

0

0

0

Net income (normalised)

(9.1)

(22.4)

(10.9)

(22.0)

1.3

Net income (reported)

(9.1)

(23.6)

(63.6)

(22.0)

1.3

Average Number of Shares Outstanding (m)

214

320

440

538

550

EPS - basic normalised (c)

 

 

(4.3)

(7.0)

(2.5)

(4.0)

0.2

EPS - diluted normalised (c)

 

 

(4.3)

(7.0)

(2.5)

(4.0)

0.2

EPS - basic reported (c)

 

 

(4.2)

(7.4)

(14.5)

(4.0)

0.2

Dividend per share (c)

0

0

0

0

0

Revenue growth (%)

204.7

(40.7)

160.0

Gross Margin (%)

-147.5

18.0

34.2

30.0

26.5

EBITDA Margin (%)

(1,089.3)

(71.1)

(8.4)

(33.0)

2.2

Normalised Operating Margin

(1,126.1)

(73.1)

(10.9)

(37.4)

0.6

BALANCE SHEET

Fixed Assets

 

 

3.2

72.7

43.8

42.3

41.9

Intangible Assets

2.1

60.2

5.6

5.6

5.6

Tangible Assets

1.0

7.1

14.8

13.3

12.9

Investments & other

0.1

5.5

23.4

23.4

23.4

Current Assets

 

 

24.4

131.9

97.7

75.8

93.8

Stocks

0.5

18.5

18.9

14.0

18.7

Debtors

0.7

26.7

33.5

30.8

58.0

Cash & cash equivalents

22.9

75.2

38.7

21.9

8.0

Other

0.3

11.5

6.5

9.1

9.1

Current Liabilities

 

 

(2.5)

(95.9)

(78.7)

(75.3)

(91.6)

Creditors

(1.4)

(27.8)

(47.5)

(29.9)

(37.4)

Tax and social security

0.0

(0.1)

(0.9)

(0.9)

(0.9)

Short term borrowings

0.0

(1.1)

(0.4)

(0.9)

(1.3)

Other

(1.1)

(66.9)

(30.0)

(43.7)

(52.1)

Long Term Liabilities

 

 

(1.0)

(5.1)

(11.7)

(13.7)

(13.7)

Long term borrowings

0.0

0.0

0.0

(2.0)

(2.0)

Other long term liabilities

(1.0)

(5.1)

(11.7)

(11.7)

(11.7)

Net Assets

 

 

24.1

103.6

51.1

29.1

30.4

Minority interests

0.0

0.2

1.2

1.2

1.2

Shareholders' equity

 

 

24.1

103.8

52.3

30.3

31.6

CASH FLOW

Op Cash Flow before WC and tax

(8.8)

(23.6)

(8.5)

(19.8)

3.5

Working capital

1.7

(4.8)

(44.1)

(15.9)

(15.2)

Exceptional & other

0.0

0.2

0.1

(0.1)

0.0

Tax

0.0

(0.9)

(0.2)

(0.5)

(0.4)

Net operating cash flow

 

 

(7.2)

(29.0)

(52.6)

(36.3)

(12.2)

Capex

(0.4)

(3.7)

(2.8)

(1.1)

(2.2)

Acquisitions/disposals

(1.0)

50.6

(1.8)

0.9

0.0

Net interest

0.0

0.5

2.7

(0.3)

0.0

Equity financing

22.9

31.3

26.2

24.5

0.0

Dividends

0.0

0.0

0.0

0.0

0.0

Other

(0.2)

1.1

(2.4)

(6.2)

0.0

Net Cash Flow

14.2

50.8

(30.6)

(18.5)

(14.3)

Opening net debt/(cash)

 

 

(8.5)

(22.9)

(74.0)

(38.4)

(19.0)

FX

0.2

2.1

(4.3)

(0.9)

0.0

Other non-cash movements

1.0

(1.8)

(0.7)

0.0

0.0

Closing net debt/(cash)

 

 

(22.9)

(74.0)

(38.4)

(19.0)*

(4.7)

Source: Company accounts, Edison Investment Research. Note: *Net cash excludes US$5m in short-term deposits.

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This report has been commissioned by Fluence Corporation and prepared and issued by Edison, in consideration of a fee payable by Fluence Corporation. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

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This report has been commissioned by Fluence Corporation and prepared and issued by Edison, in consideration of a fee payable by Fluence Corporation. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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Copyright: Copyright 2020 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2020. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

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The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

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This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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