Fluence Corporation (FLC) - 4Q19 Business UpdateFLC’s 4Q19...

Fluence Corporation (FLC) - 4Q19 Business Update

FLC’s 4Q19 Business Update was a mixed bag, with the Ivory Coast financial close and improved corporate costs overshadowed by CES revenue delays and a somewhat disappointing outlook for the SPS business. We still see the company transitioning from low-margin bespoke solutions business to high-margin pre-engineered product supplier, albeit at a slower pace than previously expected. With Ivory Coast financial close achieved, we expect EBITDA profitability during the current quarter and continue to forecast earnings improvement. We have lowered our earnings forecasts on the SPS ramp-up delay and as a result reduced our DCF-derived target price to A$0.59. We maintain our Buy rating.Ivory Coast closes but SPS outlook disappoints

The financial close of the Ivory Coast project represents a major milestone for FLC, albeit with management confirming that revenue would be recognised in 1Q20 (vs the previously expected 4Q19), which delays EBITDA profitability to the current quarter.

FY19 revenue of c.US$60m is significantly below our previous forecast (US$118.3m), with the miss largely attributable to key project delays (i.e. Ivory Coast and San Quintin).FY19 SPS revenue of US$26.5m was slightly ahead of reduced guidance (US$26m) provided at the 2Q19 update, with the fourth quarter driven largely by MABR sales (in particular via Chinese agreements) and a US$5m contract to provide a treatment system to a lithium mining project in Argentina.Outlook weaker but investment thematic remains.

Management provided FY20 SPS revenue guidance of ‘at least’ US$32.0m, with the qualifier likely representing an effort to ensure SPS guidance is maintained going forward (vs last year’s downgrade).We have therefore lowered our FY20 SPS revenue forecast from US$56.9m to US$39.0m on a slower MABR rollout in China than previously forecast, and we believe this represents reasonable upside to guidance.Update earnings forecasts, reiterate Buy rating.

We have updated our earnings forecasts, with FY20F EBITDA now US$4.3m (previously US$7.2m) and FY21F EBITDA US$13.5m (previously US$19.6m).The underlying investment thematic remains compelling and we see ample opportunity for management to build on earnings and make FY20 an inflection point for FLC.Given our updated view on earnings we have reduced our target price to A$0.59 and maintain our Buy rating.