Hi Matt
That’s the one we’re all asking ourselves. It seems that, traditionally, construction or engineering companies command a low revenue multiple. I confess I don’t know for certain why this is. It would make sense if it is around execution risk on major projects, which require great expenditure and have low margins (the margin on the Africa MOU was mentioned as 15%). Also, of course, revenue can be lumpy, as you may go from one major project to the next with not a lot of visibility on where next years revenue is coming from.
Then, however, there is recurring revenue which eliminates many of these concerns. BOT, and RaaS are both models which see regular payments coming in across a period of years and even decades. Build up enough, and you might be in the advantageous position of being able to predict minimum revenues into the future. This gives investors security and re-rates the valuation. FLC have stated that they wish to transition to greater sources of recurring revenue, but it will take time. All service and maintenance for plants we have installed is also considered recurring revenue, and this is building and will logically continue to.
However, FLC are not your average construction/engineering company, and it I sometimes wonder if the cap fits at all. Tech companies tend to have a much higher valuation applied to them, due to the old ‘blue sky’ possibilities and the fact that tech orgs tend to be highly scalable. There is certainly a legitimate argument for FLC to be valued like this, moreso in time. This is due to our unique focus on decentralisation and SPPs. SPPs have a higher margin than the big projects, 25-35% or more. They require little engineering, are highly scalable - and in terms of CMABR - has it really lost any ‘blue sky’ appeal? SPPs are our fastest growing internal revenue source, Nirobox went from $6m to $28m year on year and we’ve increased production capacity to a potential lift to $70m next year. CMABR has 35% margin, SUBRE I think may be 50% (someone correct me if thats erroneous). Churning these packaged, low-engineering, high-margin and scalable solution out of factories to a waiting marketplace would render a lumpy, low-margin construction valuation ridiculous. This is to be the core of our major future revenues, and things like the Africa plant will be a (welcome) sideshow.
Obviously the hope from investors point of view is that the valuation changes over time to acknowledge the change in our revenue streams. Currently it feels low unless you see us as no more than an everyday construction / engineering firm. I think it’s clear we’re not, but that is not yet convincingly reflected in current revenues (a fair point, which The Oracle makes).
Just another area of potential upside when the plan comes together imo. You’ll maybe recall Ross Haghighat mentioning that valuations in the water space can run high in the Peak Asset Management video interview at the time of the merger. He also reiterated this on a subsequent webcast saying that an aspirational comparison for Fluence would be Beijing Origin Water who at the time were valued at $9bn from annual revenues of $500-600m per year. Our boys have a sizeable vision in mind. Can they get us there?
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