Media update, page-2237

Nice little piece re FLC

Water matters

In 2018, Cape Town was set to become the first developed city to run out of water. The city staved off “Day Zero” (the day on which all taps run dry) by only weeks when rain finally arrived. The city’s desalination projects are st years away from completion. Cape Town is by no means unique. From Murray-Darling Basin issues and East Coast Australian droughts to California’s dustbowl and Chennai in India (see below), water oscarcity and contamination is a global and growing challenge. This also makes it a market opportunity.

Much like Cape Town, many countries are inadequately prepared for these emerging crises. Coupled with diminishing supply and rising demand, water shortages affect 2.7 bn people, today. It is estimated that water demand for food production and manufacturing will increase 60% and 400% by 2050, respectively. Overall global water consumption is forecast to double by 2050. McKinsey estimates a global water supply shortfall of 40% by 2030, a mere 10 years away.

Source: McKinsey On Sustainability & Resource Productivity 2012

So why are these cities getting caught out to dry?

Constructing traditional desalination / water treatment facilities is capital intensive, complex and slow to deploy. Centralised water treatment plants tend to be landlocked with aging infrastructure that cannot be expanded easily, and upgrades are costly. However, there is a viable alternative. Global Water Intelligence estimates by 2021 USD$22bn per annum will be spent on decentralised solutions, which are cost efficient, quick to deploy and scalable. As investors, how can we participate in such significant tailwinds?

Fluence Corporation (ASX:FLC) is a leading global provider of decentralised water treatment and waste-water management solutions. It is a pure play on the water thematic and winner of Global Decentralised Water & Wastewater Treatment Company of the Year by Frost & Sullivan in 2018. Fluence has a market capitalisation of A$200m, generated US$100m in revenue in FY18 with a US$200m order-book and operates in 70 countries across the Americas, Africa, Middle East and China.

Source: Fluence 2019 AGM Presentation

So why do we like it?

Fluence uses its patent-protected membrane aerated biofilm reactor (“MABR”) to tap into a significant total addressable market through a full suite of water treatment solutions from waste-water treatment to desalination that caters for diverse customer requirements and situations. Incumbent water treatment technology is over 100 years old and ripe for disruption. Fluence’s solutions have 90% lower energy consumption and 60-70% lower operating costs than competing technologies. Fluence has an experienced management team skillfully executing its product roll out, achieving 74% YoY organic revenue growth (December FY18).

Even with modest assumptions, Fluence’s revenue and earnings potential is sizeable. In particular, China’s has allocated US$15 bn to treat rural water sources, an opportunity Fluence is leveraging with current partnership agreements.

The balance sheet is strong with US$40.8m net cash (December FY18) and management is guiding to be EBITDA positive by 4Q 2019 which we see as a key change in its risk profile and a potential signal to the market for a re-rating.

Lastly, with over US$4 bn of flows into ESG-orientated funds during the first quarter of 2019, we anticipate a strong investor appetite for Fluence once it achieves de-risking milestones (e.g. EBITDA-positive).

Why is this flying under the radar?

Like most microcaps, we followed Fluence before any analyst coverage and it remains largely undiscovered or insufficiently understood. Fluence’s operations are global and complex requiring extensive research to understand and value. In addition, there remains a fair amount of execution risk and its growth may be volatile.

In general, microcaps can require substantial research and patience before significant returns are earned. I suggest watching for Fluence’s EBITDA-positive achievement, additional broker coverage and continued strong revenue growth.