The award of a €165m (US$188m) contract to provide water treatment to Abidjan, the largest city in Ivory Coast, is transformative in our view. This turnkey project will supply 150,000m3/day of water to 4.7 million people and include a range of treatment solutions. The win establishes Fluence Corporation Ltd (AX:FLC) as a supplier of large, innovative solutions and leads us to double our FY20 adjusted EPS forecast to US$c3.8. Despite organic revenue growth in FY19 and FY20 of well over 50%, the share price implies an FY20 P/E of 7x.
“Landmark” contract win
This turnkey CES (custom engineered solution) aims to supply and treat water from Lagune Aghien and deliver it to the nearby city of Abidjan, Ivory Coast’s industrial capital and largest city. It includes the construction of intake, treatment and piping infrastructure as well as the implementation of a range of customised treatment solutions to address the specific pollution problems faced. Completion is still subject to the government agreeing export credit financing terms with the Israel Discount Bank but construction should begin in Q319 and be finished within two years thereafter. It represents (by a factor of three) the largest deal Fluence has signed thus far. Fluence also hopes to win the associated operation and maintenance contract, which would further bolster its recurring revenue base.
Impact on financials
This deal dramatically improves Fluence’s financial profile (see Exhibit 1). While it had indicated it was close to finalising a very large contract in Africa, without visibility on timing or size, we had not factored it into our forecast (see Time for better treatment?). Taking company guidance at face value lifts our FY19 sales forecast by US$20m and FY20 by US$80m (a 13% and 43% increase, respectively). It turns FY19 profitable on an EBITDA basis (to +US$1.5m) and nearly doubles our FY20 EBITDA forecast to US$23.0m. Our FY20 adjusted EPS also doubles to US$c3.8.
Valuation and context
Fluence’s strategic priority remains growing its higher-margin “smart” product (SPS) and recurring revenue base to build margins and visibility (see Delivering on a demanding target). Nevertheless, this win is transformative in our view. It demonstrates it is also a credible supplier of large, complex turnkey custom solutions. Factoring in the financial impact, Fluence will deliver well over 50% organic revenue growth in both FY19 and FY20. Despite this the shares are currently rated at just 7x adjusted FY20 EPS. A DCF approach that reflects the growth and margins we believe Fluence is ultimately capable of suggests an A$0.75 per share valuation, double the current share price.
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.
Revenue reclassification and changes to forecasts
Exhibit 1 highlights the significant boost this contract provides to our forecasts. The company also published its full FY18 financials on 27 February which included a $5m revenue reclassification as a result of the recent adoption of hyperinflation accounting in Argentina. Originally Fluence recognised revenue from its PDVSA contract ($27m in FY18) through its Argentinian subsidiary in US$, the currency the contract was priced and paid in. However, the recent publication of a inflation index by the Argentinian government enabled an accurate fx rate to be calculated for the first time and, as a result, the company was obliged to recognise all FY18 Argentinian revenue in local currency and reclassify some revenue as foreign exchange gains. This reclassification has no impact on cash collection, forecasts or valuation. All PDVSA cash (in US$) has already been collected and the expected revenue from this contract in FY19 is less than $2m.
