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.
Written by
Fluence Corporation |
Contrasting trends continue |
Q4 results |
General industrials |
10 February 2020 |
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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* |
EV/revenue |
EV/EBITDA |
P/E |
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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