Bursting my balloon

I’ve tried to get a better understanding of Fluence’s current situation, but I just can’t seem to know it well enough to assess the risks properly. This is the link to their latest investor presentation:

https://www.fluencecorp.com/wp-content/uploads/2023/01/Fluence-Corporation-FLC-Q4-FY2022-Presentation-30-January-2023-ASX.pdf

My biggest concern is that it is still — at heart — a China story. China seems to account for a significant portion of its recurring revenue and Smart Product Solution (SPS). I don’t know enough about Fluence’s manufacturing process, but I suspect there is disproportionate exposure to China — at least somewhere in their supply chain — there also.

To me all this sovereign risk presents an asymmetrical bet in the wrong direction. Given the current geo-politics, new contracts in Taiwan and Korea provide me with with little comfort and don’t present the diversification I would need to stay. This is now firmly in my too hard basket.

I just don’t get it. I don’t understand spy balloons. They seem terrifyingly low-tech. Their crudeness, randomness, and sheer brazenness just serves to remind me how arbitrarily my capital — however tiny of a percentage of Fluence it composes — can be treated at the hands of an autocratic government.

At the time of writing the US Air Force has now beaten me thrice in pulling a trigger [1] [2] [3]. I’m trying to get out before there is a fourth or beyond. Fluence is a sell for me now. Hard pass.

I’m still holding Fluence out of complete inertia. I haven’t looked at it properly for some time — during which there have been some seismic geopolitical changes. This is particularly significant because much of my thesis was based on a China growth narrative. I’ll look into it more over the coming weeks, but there are a lot of moving parts. Just a classic Frogurt case as Strawman might say.

My perception is that: the sovereign risk for western capital has intensified (that’s bad); China’s need for innovative clean water has likely increased (that’s ‘good’ — only in the sense of this investment obviously); COVID-19 happened (that’s bad); it’s now 2022 (that’s…good?); China’s domestic growth is possibly imploding (that’s bad)…et cetera, et cetera, et cetera.

If I can’t get my head around it this is looking like a sell for me and a cutting of my losses. Maybe I can go now.

Recently I had an interview and one of the panel asked about my Linkedin profile – more specifically, why I was not posting to boost my personal brand profile. Obviously, this was not in the evaluation of Tom Pokorsky, Fluence new CEO

https://www.linkedin.com/in/thomas-pokorsky-93a0b74/

https://www.linkedin.com/in/thomas-pokorsky-0515191a8/

Maybe he is more focused on his job. Pokorsky brings 35 years’ experience in water with 15 years in a CEO seat:

• Founded and grew Nexom in the wastewater sector, delivering 25% annual revenue growth and 50% EBITDA growth, leading to its sale to KKR. 
• Water Pollution Control Corporation (later “Sanitaire”), doubled revenue and profits, negotiated its sale to ITT Industries, and then grew its Advanced Water Treatment group (now part of Xylem) from $60M to $350M in four years, including $100M in organic growth and five successful acquisitions on three continents.

Pokorsky is on a 4 year contract with a US$465,000 base salary plus a discretionary bonus of up to US$75,000. He was also granted 31,250,000 sign-on stock options (~5% of outstanding issued shares).

Richard Irving who has been in the CEO chair for the last 2 years will be heading to the board as chairman.

As the business progresses toward profitability, I’m looking to see if Pokorsky experience and contacts can progress this. 

This is a company that is building, selling, and installing real and proven water solutions that make a difference. Maybe they need to talk about their blockchain linked monitoring (they don’t have this) to make the market take an interest, or am I missing something?

Revenue is up, for smart product and customer engineered solutions while recurring revenue has seen a slide. Overall though revenue is up 18% over FY20, to exceed $100M. Expenses are also lower by approximately 8% which has resulted in cashflow positive for Q4/21 although still negative for FY21.

They appear to be beating competitors in sales in the self-respiring membrane aerated biofilm reactors (MABR) market which provide an energy-efficient alternative that facilitates a very high-quality effluent.

Earnings guidance for FY22 is for smart product solutions revenues of $45 million or up 22% growth FY21 which is supported by a work backlog.

This is the risk - the company is carrying a reasonable debt load at US32.0M of debt, around 5% increase although it has US40M in cash offsetting this. Some of the loans are bank guarantees against inflight project which are expected to be released in FY22.

Will be watching to see the debt reduced with the bank guarantees released and to see if they can continue to grow the sales book. If they can tip further toward being cash-flow positive and do this and while maintaining a healthy balance sheet the share price should improve (without a linked blockchain monitoring announcement). 

Continuing to hold a small parcel on Strawman.

Good news on the sales front today from Fluence... as a long-term RL holder (underwater), looking forward to more of these!  More competition starting to appear in this space and FLC has been unable to take advantage of being in early, hopefully they can ride the next wave.

Fluence Secures US$8.5M MABR Order in Cambodia

• Largest MABR plant to date will treat wastewater for 160,000 people

• Due to commence operation in H1 2022

• Third MABR plant in Cambodia

• X-WATER to be Fluence’s exclusive partner in Cambodia

  Fluence Corporation (ASX:FLC) is pleased to announce that it has won an US $8.5M contract from the Cambodian Government’s Ministry of Land Management, Urban Planning and Construction, to build a third SUBRE plant using MABR technology in Sihanoukville, Cambodia. The SUBRE plant will consist of 90 three-tier MABR stacks, each consisting of three MABR spirals in a tower configuration, treating wastewater for a population of 160,000. Fluence will again team with engineering partner X-WATER, following successful collaborations on the first two SUBRE plants now operating successfully in Sihanoukville. These initial plants are the first biological treatment plants of any kind in Cambodia.

Water is becoming more and more important the world over, climate change is going to increase this as weather patterns change. Moving wastewater to non-potable water suitable for irrigation for example. The technology which has now been commercialised for 5 years can be dropped on site as an “operational in weeks” unit. Once running the system has a low energy demand – less by about half compared to competitors. 

The systems are being pitched as decentralised, which eliminates the requirement for transporting water, or even building the pipelines in the first instance. 

This is a similar theme to changes in the energy sector. Long strings of power lines are expensive to build and maintain, so decentralised microgrids are being adopted. Microgrids are being built in places such as islands or remote communities which was my thought process for Fluence systems.

As ESG changes are pushed in dogooderism or via legislation, water treatment system may be end up in urban environments that demand wastewater recycling. 

In addition to the wastewater systems, the company also build desalination plants which are also drop onsite installations - again, acknowledging there is more to it that simply delivery. 

Have been watching this one from the sidelines, however, they are starting to get runs on the board both in sales and deployments. That and they are no longer a loss proposition. 

16-Nov-2020:  Fluence Strategic Repositioning, Change in CEO

Fluence repositions strategy to focus on MABR and Smart Products Solutions, changes MD & CEO, and reaffirms guidance Summary

• Strategic repositioning is designed to focus primarily on three (3) key segments:
  • MABR wastewater solutions in China and Southeast Asia;
  • NIROBOXTM desalination solutions in the Middle East and Southeast Asia; and
  • the Ivory Coast water treatment project
• Continued development of strategic channel distribution partners and further improvement of operational efficiencies
• Effective immediately, Richard Irving, Chairman, will also assume the role of CEO, replacing Henry Charrabé
• 2020 guidance reaffirmed

Fluence Corporation Limited (ASX:FLC) has become a leader in the decentralized water, wastewater and reuse treatment markets through Smart Products Solutions, including MABR-based Aspiral™ and SUBRE as well as our NIROBOX™ technology. To further leverage and build on this success, Fluence is repositioning its global business to focus on these products in the most attractive market segments with the goal of achieving more rapid, consistent and profitable growth.

--- click on the link above for the full announcement ---

[I do NOT hold FLC shares.]

28-Sep-2020:  Fluence Secures Desalination Project Upgrade in Egypt

31-Aug-2020:  After Market Close:  Appendix 4D and Half Year Accounts   and   Half Yearly Report and Accounts   plus   H1 2020 Fluence Corporation Results Deck

The Fluence (FLC) Half Year (1st half of FY20) results have not yet been fully audited, so they're taking advantage of the recently announced ASIC relief titled “ASIC Corporations (Extended Reporting and Lodgement Deadlines—Listed Entities) Instrument 2020/451” dated 15 May 2020 and the corresponding ASX Class Waiver issued on 16 June 2020 titled “Extended Reporting and Lodgement Deadlines” to lodge its Half Year Accounts subject to audit review, and defer lodgement of the audit reviewed Half Year Accounts until no later than 30 September 2020.  I notice that ISX (iSignThis) did the same thing last week.

Fluence's H1 2020 unaudited numbers were:

• Revenue from ordinary activities: Up 141.3% to US$57,373,000 (US$57.373m)
• Income from ordinary activities after tax attributable to members: Up 109.9% to US$1,736,000 (US$1.736m)
• Net income after tax (from ordinary activities) for the period attributable to owners of Fluence Corporation Limited: Up 111.6% to US$2,041,000 (US$2.041m)
• Dividends (distributions): None declared, same as pcp
• Net tangible asset per security as at 30 June 2020: $0.06 (6c) (December 2019: $0.05)

Fluence by the Numbers (from page 3 of the Results Deck):

• 7,000+ Reference sites
• 70+ Countries
• 180+ MABR Installations
• 110+ NIROBOXTM Desalination Systems
• 350+ Employees
• 150+ Engineers

H1 2020 Key Highlights (from page 4 of the Results Deck):

• Keeping employees, partners and customers safe – adjusting to COVID-19 conditions
• Operating revenue up 143% to $57.4m*
• SG&A cost continued to decline, down 27% on H1 2019
• $6.2m EBITDA
• Recurring revenue up 18% to $3.9m from BOOT and O&M contracts
• Smart Products Solution (SPS) revenue up 89% vs. H1 2019 to $10.6m
• Achieved financial close of the Ivory Coast Project
• Secured debt facility of $20m from Upwell Water
• Positive NPAT of $1.7m
• Cash flow positive in Q2 2020 (June Qtr), cash balance of $20.2m as at June 30, 2020
• Backlog of $234m as at June 30, 2020

* = All numbers in presentation are USD (US$) if not otherwise stated.

--- click on the links above for more ---

[I'm not keen to hold China-facing smaller companies at this point in time, so FLC and PET (who reported last week - on the 26th) are two companies I am avoiding at the moment.]

08-July-2020:  I can see why FLC might look like rediculously good value at around 20 cents per share, but their chart is truly horrible, and they are very exposed to China - who may well still be trying to punish Australia for daring to ask for an inquiry into the origins and early response to COVID-19. I have been out of FLC for a long time now, and haven't been following them very much. I also removed them from my Strawman.com scorecard some time ago because I saw little reason why their SE SP trajectory was going to suddenly change and head north again. I removed PET recently for much the same reasons. A small Australian company with too much invested in China at the wrong time.

Other issues specific to FLC, in my opinion, include:

1. Most of the board and management have exposure via options rather than direct shares. Only their Chairman has a decent holding - 37.265 million shares. Their CEO/MD, Henry Charrabe, has 12.35 million options, but no shares. Two NEDs (non-executive directors) have half a million shares (currently worth only around $100K) and three directors (half of their 6-member board) hold no shares (just options), which includes Mr Charrabe.
2. The global adoption of their water-purification tech has been less than impressive.
3. There was a lot of hype in prior years, and it seems to me that the hype was entirely unjustified.
4. They are a small microcap company with a market cap of only around $130m, and they keep raising more money - so are regularly asking their shareholders to tip in more and more money, as their profitability timeline keeps getting pushed out further and further. They had less than $17m of cash at March 31, 2020.
5. Last month they said, "Despite the delay in receiving the payments from the Ivory Coast Project, the Company expects operating cashflow for Q2 2020 to converge towards cash-flow breakeven. The expected improvement in operating cash flow in Q2 2020 compares to a US$7.9 million operating cash OUTFLOW in Q1 2020, and reflects the ongoing focus on lowering overhead costs and strong cash collections." More positive spin, but little actual real progress, in my opinion.
6. I jumped on them in prior years as a momentum play, and, unfortunately, the momentum is all going the wrong way now, so I'm not interested.
7. I don't mind these sort of beaten-down stories if I trust the management based on their prior track record, and I really like the business model, and think they've got strong tailwinds both as an industry and as a business within that industry, but I'm not sure that those conditions exist here.

Of course, 2 days later (on Friday 10th July, 2020) - they released this announcement:  Fluence Achieves Positive Quarterly Cashflow.  And rose +17.5%.

I think a number of my points do however remain valid.  On the other hand, this could be a positive inflection point for FLC.  Time will tell.