Yesterday I was fortunate to escape from the office for a few hours, and I’m bloody glad I did make the effort. In my mind yesterday represented the day that EMC as we know it ends, with Fluence being unveiled to the world, to become an unstoppable force in the global water treatment market. More on this later.
The first and most important thing about EMC/Fluence is the team. This point has been stated many times over on these boards, but yesterday was the first time I had the opportunity to meet the team face to face, and they are an incredible bunch. We arrived 20 minutes early, so had an opportunity to have a one on one with Richard Irving, and discussions with Peter Marks, Ross Haghighat, Eytan Levy and Henry Charrabe. The first impression that you get from speaking with each of them is that they are so incredible personable, especially for a bunch that have founded, invested in and grown billions of dollars of shareholder value (Richard and Ross alone creating $4B and $3B respectively). Each and every one of them is up for a chat, with no pomp or self-importance, which contrasts so vividly with the pretentious wankers that you often meet at exec levels. Each one of them is considered in their speech, clearly extremely smart, and focused on getting on with the job and achieving real results. I was particularly impressed with Henry, the incoming Fluence Group CEO, who was so incredibly humble and actually quite a funny guy. His presentation was extremely impressive and he will make an exceptional leader for Fluence going forward. One thing was for sure, each and every one of the directors was extremely excited going in to the meeting, and for good reason.
The formalities of the meeting were knocked over fairly quickly, which led straight in to the Fluence unveil and presentation. It was clear that most in the room were taken by surprised in a very good way and it was immediately apparent that this was a game changing milestone of the best possible kind.
Richard initially announced the merger between EMC and RWL, and launched straight in to a video on RWL and EMC, which featured Ron Lauder extensively, including many pictures of him with global influencers such as Donal Trump, the UN, etc. The video highlighted Ron’s excitement at EMC and RWL coming together to establish a global that will change the water treatment market.
Here is a smattering of points that I took away from the Fluence presentation from Richard and Henry:
- RWL made 4 acquisitions in the first 18 months of existence, including reverse osmosis
- RWL has grown revenues (USD) from $20m, $40m, $60m and are now forecasting FY17 revenue growth of 50% to roughly $120m AUD;
- Richard and Ross H stated that they have been very close to the RWL team for many years, and thus it’s obvious that this merger is not the result of an overnight agreement but one that has been years in the making.
- On completion of the merger, Fluence will bring together EMC’s current cash balance ($20m USD end of March), RWL’s cash balance (unknown, as they are private) and a further $20m injected from Ron Lauder. Richard stated that funding is well and truly taken care of. I’m delighted in this, because it means no loose handed insto’s taking stock in a CR and destroying the shareprice in taking their meagre gains. Even better, if those insto’s now want a piece of the action, they need to buy on market, which will substantially improve demand and thus the SP.
By all accounts it sounds like Ron Lauder is playing the long game here, holding a 34% stake in the combined entity. I have the impression he wants to see a multi-billion dollar business out of Fleunce, with no intention on exiting his position any time soon.
- There is a huge gap in the water treatment market. This was stressed at great lengths, and herein lies the relative advantage of Fluence. The existing market players are huge multinational water companies, all of which are set up to serve projects price from the hundreds of millions to billions of dollars. These projects are centralised water treatment solutions, which can take years in negotiations, and over a decade to implement (Richard used the California desalination plan as an example, 15 years of contracting and construction).
The gap in the market is that there is no global player serving the smaller scale decentralised solutions that has a truly first class suite of products and a size of operations to serve needs on a global basis at scale. This is where the combined Fluence can dominate. By serving the decentralised market, of which the global opportunity is possibly >$100B, Fluence can establish itself as a leader in technological solutions, speed to market and global reach. This will make Fluence unstoppable, as they become a multinational beast, but uniquely focused on the smaller decentralised market.
The incumbent global players are simply too slow to respond to this market, with their complicated internal processes making them slow to respond to tenders and project rollouts. Henry contrasted this with RWL’s success in achieving speed to market, rolling out a 24m litre/day reverse osmosis sea water treatment plant in 8 months. This is reflective of the expectations of the smaller end of the market, where customers need solutions fast and efficiently delivered.
- On products, Fluence group will have a suite of solutions spanning waste water treatment, sea water reverse osmosis, waste water to energy (methane gas), custom solutions (toxic substance removal, disinfection etc) and water re-use. This is a comprehensive product offering to meet the diverse needs to the decentralised treatment market, opening up so many verticals and potential customer groups for the company. A focus of the company will be for EMC and RWL to adapt their products into ‘containerised’ solutions that can literally be shipped straight to the customer as a ‘plug and play’ setup, which is also modular and can be scaled up as customer needs dictate. Again, this is all part of their speed to market.
Eytan Levy will transition from EMC group CEO to head of Fluence Group innovation, driving R&D and innovation across the entire product portfolio (current and future). Innovation will continue to be an important aspect of the business to ensure Fluence is brining first class solutions to its customers.
- Richard spoke on the significance of both the recent US EPA certification and the Stanford University reference site. Both of these are incredibly important for sales across “the America’s”, with significant companies in California such as the global tech companies that have huge campuses wanting to see an operating plant in their jurisdiction. It can be expected that once the Stanford site is independently verified by the Stanford team there will be regular site tours by prospective customers as part of their purchasing decision.
- As a combined group they will be focused on driving margin improvement across all products, leveraging the technological strengths of both companies and economies of scale in the joint operations.
- A massive advantage of Fluence will be its project finance and RAAS offering to customers. This provides customers with the option to avoid capital spending by purchasing treated water on an opex basis. They used the example of a project with a capex of $24m, which generates $7m in water sales per annum. This type of project lets Fluence get paid for the plant construction up-front, paid for ongoing servicing of the plant, and taking a split of the profits from water sales each year. This type of facility has a very attractive IRR and debt and equity payback period. They talked about a 70/30 debt/equity split on this type of project and stated they are working on scalable solutions where the equity can be funded off balance sheet by third-party funders in return for a profit share, thus taking pressure off the Fluence balance sheet as these funded projects grow in number.
Richard mentioned that last week they met with $600B worth of potential debt providers and they will clearly be working hard to find a suitable finance partner. The benefit of the combined Fluence Group is that they now have scale in projects which will be more attractive to a finance partner.
Richard also restated that the valuation attached to each contracted RAAS project is far higher than for one-off plant sales, so this brings in attractive utility style valuations aspects for Fluence as a whole, which is great for marketcap appreciation.
- For what it’s worth, Richard mentioned a few times that he and Ross H have been involved in Nasdaq listings, which I take as more than throw-away references. I get the feeling that the combined scale of Fluence is part of the bigger picture move to take the listing to the North American boards.
Overall it is clear that the board and management of both companies have a significant vision in mind, and they see Fluence as a future global beast with a massive valuation. I see that valuation eventually exceeding $10B now, based on the significant scale of the market the combined group can service and the sheer size of revenue, especially with a significant portion of revenues coming from long-term treatment contracts.
I can’t help but feel EMC shareholders are getting RWL for an absolute steal, owing to the fact that EMC enjoys the valuation uplift of being a listed entity, while RWL is a private company. I also feel very confident that this transaction will complete (although nothing is ever certain). The fact that EMC/RWL announce a strategic relationship, then weeks later they roll out a plant to ship to China shows they have been working together in the background for quite some time. The relationship between both parties is well advanced, it has only now become public for everyone to see, and I feel in every respect that the market is playing catch up.
From here, with no avenue to buy discounted placement shares, and Fluence becoming a global beast with $120m AUD existing revenues, I’m expecting a steady and sustained rise as global eyes turn to Fluence and buying starts to accelerate from all corners of the globe. And I can’t help but go back to the team – these guys have done this many times before ,growing billions in shareholder value. They are a class act with global connections and a global outlook. I’m backing them all the way in taking Fluence to become a global leader valued in the multi-billions. You literally could not have a better team to be working towards this feat. I am more confident on my investment that I ever have been and I know others who attended yesterday are feeling the same! Please have a detailed read of the AGM presentation, as this is a fantastic document outlining what is ahead and why Fluence is going to be such an incredible company going forward.
Good luck everyone!
(20min delay)