In a coverage launch on Friday, Kim gives DMG a “Buy” rating with a 12-month target price of $1.50, representing a 348 per cent return on investment at the time of publication.
Founded in September 2016, Vancouver’s DMG commenced trading on the TSX Venture in February of this year through a reverse takeover of capital pool company Aim Explorations Ltd. The company aims to provide end-to-end solutions for monetizing blockchain, including currency mining, mining as a service (MaaS), platform development, forensics and blockchain analytics.
Kim says he likes that DMG’s focus is on diversification, something other crypto-miners only aspire towards. “DMG’s diversified business strategy gives it a revenue mix advantage over pure-play miners who are solely dependent on the price of Bitcoin,” says Kim. “The company’s goal is to become the blockchain domain expert across multiple industries and it is very cleverly and quickly leveraging relationships with world-class companies.”
“Cryptocurrency mining will become increasingly commoditized over time, so harvesting today’s profits and investing in future initiatives is a critical element that differentiates blockchain mining companies,” says the analyst. “We are convinced that DMG will emerge as a disruptive innovator and will provide investors with outsized returns.”
Kim says that although DMG has competitors in each silo of its services and products, the company has a few key advantages, namely: (1) DMG’s blended model involving company-owned miners as well as MaaS allows for rapid scalability; (2) DMG’s management team comes with a wealth of experience in the space; and (3) the company has a focus on the Japanese market, which boasts the world’s largest and first regulated cryptocurrency market.
The analyst arrived at his valuation by a blended approach, including a 10x EV/EBITDA of his fiscal 2019 forecast of $15.9 million (which compares to its peer group trading at three- to 15x); an FCF yield estimate; a 5x EV/gross profit to his fiscal 2019 forecast; a 1x EV/PH to his fiscal 2019 forecast; and a DCF calculation assuming a 15 per cent discount rate and 5x multiple on his terminal value.
Kim sees DMG producing revenue and EBITDA in FY18 of $10.7 million and negative $8.2 million, respectively, and revenue and EBITDA in FY19 of $58.9 million and $15.8 million, respectively.
Disclosure: DMG Blockchain is a sponsor of Cantech Letter