Good progress and guidance unchanged

Fluence Corporation 1 May 2020 Update
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Fluence Corporation

Good progress and guidance unchanged

Q1 results

General industrials

1 May 2020

Price

A$0.29

Market cap

A$181m

A$1.52/US$

Net cash (US$m) at end FY19

19

Shares in issue

625m

Free float

60%

Code

FLC

Primary exchange

ASX

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(6.7)

(29.1)

(39.8)

Rel (local)

(14.8)

(9.8)

(3.0)

52-week high/low

A$0.5

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

Q220 trading update

July 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

Q1 saw revenue substantially beat our estimates and EBITDA turn positive. Some regions and products have been affected by COVID-19, but FY20 sales guidance remains intact and we leave our numbers unchanged. The company is on track to receive a cash payment of over $34m from its Ivory Coast contract in Q2. Receipt of this payment is not explicitly factored into our forecast and should address balance sheet concerns.

Year end

Revenue (US$m)

Adj EBITDA*
(US$m)

EPS*
(c)

EV/
revenue (x)

EV/EBITDA
(x)

P/E
(x)

12/17

33.2

(23.6)

(7.0)

4.3

N/A

N/A

12/18

101.1

(8.5)

(2.5)

1.4

N/A

N/A

12/19

61.3

(27.8)

(5.8)

2.3

N/A

N/A

12/20e

156.0

3.5

0.2

0.9

40.9

89.9

Note: *Excludes acquired intangibles amortisation, exceptionals and share-based payments.

Ivory Coast contract kicks in

Total revenue in Q1 of US$47m (up nearly fourfold year-on-year) substantially beat our $34m estimate. After achieving financial close on its Ivory Coast contract in January, Fluence recognised US$34m in revenue from this project alone. This revenue helped turn the business EBITDA positive in Q1 and, with the associated cash payments expected in May, it should ensure it turns cash flow positive in Q2.

Good progress in SUBRE

The highlight elsewhere was a US$7m SUBRE order in Cambodia. Aside from being a big win for Fluence’s latest (proprietary) technology, it also represents its biggest Smart Product Solutions (SPS) win outside China. Recurring revenue was $3m (tracking ahead of the rate needed to deliver FY20 guidance of $9m) and total orders were $12.5m, up year-on-year despite COVID-19. The business is seeing weakness in Nirobox and delays to its contracts in Peru and San Quintin due to lockdowns. This has affected cash flow (Q1 cash burn of $7.9m was higher than management had expected), but the overall effect has been modest.

Guidance unchanged: On track despite COVID-19

Management reiterated FY20 guidance of SPS and recurring revenue above US$32m and $9m, respectively, and now expects over $120m from Custom Engineering Solutions (CES) (ie total revenue of $161m). With $47m delivered in Q1, additional revenue from CES contracts plus SUBRE expected in H2, and a healthy (US$228m) order backlog, Fluence appears on track. We leave our $156m revenue forecast unchanged.

Valuation: Long-term prospects justify upside

At A$0.29 Fluence’s share price is down 33% ytd and is close to record lows. It had US$16.9m in cash available at the end of Q1, an unused credit facility of US$47.9m earmarked for build, own, operate and transfer (BOOT) contracts and a further $1.2m facility for general funding. Receipt of payments from the Ivory Coast in Q2 (more than US$34m) should help alleviate concerns about its balance sheet. Recent wins in China and now Cambodia highlight the value of its technology. Our DCF-based valuation, which reflects this long-term potential, remains A$0.57/share, and implies a doubling of the current price.

Exhibit 1: Financial summary

US$m

2016

2017

2018

2019

2020e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

0.8

33.2

101.1

61.3

156.0

Cost of Sales

(2.0)

(27.2)

(67.4)

(42.0)

(114.7)

Gross Profit

(1.2)

6.0

33.7

19.3

41.3

Adj. EBITDA

 

 

(8.8)

(23.6)

(8.5)

(27.8)

3.5

Operating Profit (before amort. and except).

 

(9.1)

(24.3)

(11.0)

(30.4)

0.9

Amortisation of acquired intangibles

0.0

0.0

0.0

0.0

0.0

Exceptionals

0.1

(1.2)

(51.9)

1.3

0.0

Share-based payments

0.0

0.0

0.0

0.0

0.0

Reported operating profit

(9.1)

(25.4)

(62.9)

(29.1)

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)

(30.9)

1.3

Profit Before Tax (reported)

 

 

(9.1)

(22.9)

(62.4)

(29.6)

1.3

Reported tax

0.0

(0.7)

(0.4)

(2.0)

0.0

Profit After Tax (norm)

(9.1)

(22.4)

(10.9)

(32.9)

1.3

Profit After Tax (reported)

(9.1)

(23.6)

(62.8)

(31.6)

1.3

Minority interests

0

0

(0.2)

1.0

0

Discontinued operations

0

0

0

0

0

Net income (normalised)

(9.1)

(22.4)

(11.1)

(32.0)

1.3

Net income (reported)

(9.1)

(23.6)

(63.0)

(30.6)

1.3

Average Number of Shares Outstanding (m)

214

320

440

553

624

EPS - basic normalised (c)

 

 

(4.3)

(7.0)

(2.5)

(5.8)

0.2

EPS - diluted normalised (c)

 

 

(4.3)

(7.0)

(2.5)

(5.8)

0.2

EPS - basic reported (c)

 

 

(4.2)

(7.4)

(14.3)

(5.5)

0.2

Dividend per share (c)

0

0

0

0

0

Revenue growth (%)

204.7

(39.4)

154.5

Gross Margin (%)

-147.5

18.0

33.3

31.4

26.5

EBITDA Margin (%)

(1,089.3)

(71.1)

(8.4)

(45.3)

2.2

Normalised Operating Margin

(1,126.1)

(73.1)

(10.9)

(49.6)

0.6

BALANCE SHEET

Fixed Assets

 

 

3.2

72.7

44.1

46.6

41.9

Intangible Assets

2.1

60.2

5.6

6.0

5.6

Tangible Assets

1.0

7.1

14.8

14.2

12.9

Investments & other

0.1

5.5

23.7

26.4

23.4

Current Assets

 

 

24.4

131.9

97.7

87.6

93.8

Stocks

0.5

18.5

18.9

12.6

18.7

Debtors

0.7

26.7

33.5

39.8

58.0

Cash & cash equivalents

22.9

75.2

38.7

21.9

8.0

Other

0.3

11.5

6.5

13.3

9.1

Current Liabilities

 

 

(2.5)

(95.9)

(80.1)

(72.6)

(91.6)

Creditors

(1.4)

(27.8)

(48.8)

(43.8)

(37.4)

Tax and social security

0.0

(0.1)

(0.9)

(0.0)

(0.9)

Short term borrowings

0.0

(1.1)

(0.4)

(0.9)

(1.3)

Other

(1.1)

(66.9)

(30.0)

(27.9)

(52.0)

Long Term Liabilities

 

 

(1.0)

(5.1)

(10.7)

(14.5)

(13.7)

Long term borrowings

0.0

0.0

0.0

(2.0)

(2.0)

Other long term liabilities

(1.0)

(5.1)

(10.7)

(12.5)

(11.7)

Net Assets

 

 

24.1

103.6

51.1

47.1

30.4

Minority interests

0.0

0.2

(1.2)

(1.1)

(1.2)

Shareholders' equity

 

 

24.1

103.8

49.9

46.0

29.2

CASH FLOW

Op Cash Flow before WC and tax

(8.8)

(23.6)

(8.5)

(27.8)

3.5

Working capital

1.7

(4.8)

(44.1)

(7.9)

(13.2)

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)

(10.1)

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)

(12.3)

Opening net debt/(cash)

 

 

(8.5)

(22.9)

(74.0)

(38.4)

(19.0)

FX

0.2

2.1

(4.3)

(0.9)

(1.6)

Other non-cash movements

1.0

(1.8)

(0.7)

(0.0)

(0.4)

Closing net debt/(cash)

 

 

(22.9)

(74.0)

(38.4)

(19.0)

(4.7)

Source: Company accounts, Edison Investment Research

General disclaimer and copyright

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 Edison analyst 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.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

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.

New Zealand

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.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

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 (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

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 Edison analyst 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.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

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.

New Zealand

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.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

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 (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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