Very solid quarter, both financially and what is happening on...

Very solid quarter, both financially and what is happening on the ground. SPS revenue is heading in the right direction, with guidance reaffirmed with at least US$35m SPS revenue this financial year.

Good news that they weren't impacted by the recent floods in Asia and Europe (for now), and that we are in discussions for several sizeable SUBRE projects in Cambodia.

Ivory Coast is low margin, but the sheer size is bank rolling the transition to a higher margin SPS business after it is commissioned in early 2023. So essentially Fluence have 18 months from now to at least replace the Ivory Coast revenue and ideally increase it by 2023 if not 2024. If they can achieve that, then they will be a sustainable business.

To achieve this though they will need to see a sizeable uptake in 2022 and beyond.. which as you can appreciate, if MABR starts to take off in Asia and China, and Nirobox in the Middle East.. then is really within reach given the somewhat modest uptake thus far (but is actually quite quick for the water industry).

Headwinds that will need to be overcome include:
- COVID 19 lockdowns/quarantine
- MABR awareness/adoption
- De-centralised water solutions awareness/adoption

As and when the above headwinds are overcome, they will become tailwinds and will contribute to the snowball effect that Fluence need in 2022 and beyond. If they can also keep reducing SG&A costs, it will help immensely. Water scarcity, treatment and quality issues are only going to be magnified as the years go on and this will be a tail wind driving investment into this sector, and with government spending (fiscal spending) on infrastructure likely to play a prominent role in the coming years globally to assist in the post-COVID recovery which will take many years ... a decentralised approach is now a viable option that was not there just a few years ago.

This is what I see 2023 looking like:

Total revenue = US$150.0m
COGS = US$97.5m
Operating profit = US$52.5m

SG&A = US$26.4m
R&D = US$4.0m
Total operating costs = US$30.4m

Underlying EBITDA = US$22.1m

Key metrics (2020 Annual Report post- Ivory Coast business metrics)
Gross Margin = 35%
Operating costs/revenue = 20%
Underlying EBITDA/revenue = 10%

The operating costs of US$30.4m have been held constant with a modest uplift to what they incurred in 2020. If they can somehow continue to lower it, then it makes the amount of revenue we need to generate to achieve the above post Ivory Coast metrics. But for now, I'll assume it will actually grow a little (though 2021 is looking to be lower than 2020).

So the key thing we can try forecast to see what is required to achieve approximately US$150m in SPS and recurring revenue by 2023.

	Segment revenue	2019	2020	2021 (FCST)	2022 (FCST)	2023 (FCST)	2024 (FCST)
1	CES	27.3	56	60	60	10	0
2	SPS	26.5	32.4	35.6	53.5	114.9	172.4
3	Recurring	7.1	8.1	8.9	10.7	26.7	32.1
4	Total revenue	60.9	95.5	104.6	124.2	151.7	204.5
5
6	SPS growth y/y	21%	22%	10%	50%	115%	50%
7	Recurring growth y/y	11%	14%	10%	20%	150%	20%
8	Notes:					Recurring uplift due to Ivory Coast maintenance contract win

As you can see if we hit the bottom of our range in SPS revenue this year of US$35m, and a modest 10% increase in recurring revenue.. we will need approx 50% growth in 2022 in SPS and 20% in recurring revenue, with 2023 being the hockey stick year at the very latest when adoption is in full swing and all the headwinds have well and truly turned into tailwinds.

I'll leave you all to be the judge of whether or not you think the above is realistic... as we can only judge by the progress being made each quarter, and when I hear five new partners picking up pilot Aspirals in China in a quarter, with the likes of China rail having yet to place orders for what we know are going to be sizeable once they are made, and the momentum in SE Asia and installed MABR plants up to 281, being a true market leader in the MABR decentralised water treatment space... it's something that I personally believe is achievable.. and as you can see once they get momentum, the growth beyond 2023 will be a sight to behold.

Some other charts I've maintained which I find informative:



Two things I'd like to point out on the above chart... FLC have managed to avoid dilution in what has been an extremely challenging business environment. They have sought debt (where they can increase by another US$30m if needed) in place of equity, and worked hard to reduce SG&A, and they have done so successfully.

The other thing is the market cap is literally at it lows... which is a stark contrast to the graph below on how the business is trending..


The key line is the dotted 12 month rolling average net operating cash flow. Richard hinted at this today in the call.. whilst the net cash inflows and outflows each quarter are choppy, the rolling average worm is trending up. Trend is your friend, and when the trend is moving in the right direction and the market cap is lagging behind... could be a sign that one of these will converge in the coming quarters.

Goodluck all