PI Financial analyst Kris Thompson loves the potential associated with Canadian crypto play Luxxfolio Holdings (Luxxfolio Stock Quote, Chart, News, Analysts, Financials CSE:LUXX), initiating coverage on December 14 with a “Buy” rating and target price of $1.20/share, translating to a projected return of 167 per cent.
Founded in 2017 and headquartered in Vancouver, Luxxfolio Holdings is a publicly traded vertically-integrated digital asset company which runs an industrial scale cryptocurrency mining facility in the United States, currently powered 60 per cent by renewable energy, and more broadly has a focus on the blockchain ecosystem and the generation of digital assets.
Luxxfolio came about as a financial technology company that was developing a cloud-based blockchain platform to enable users to record and authenticate luxury assets and use them to qualify for personal financial products such as loans, credit cards and insurance products.
The company’s SmartLuxx technology platform used QR codes and smartphone apps to tag and verify luxury items that were tracked like a portfolio of assets, eventually expanding to authenticate, secure and track contracts and documents in addition to physical-based assets, though it had still yet to generate revenue as of May of this year.
However, the company has pivoted to Bitcoin mining and earlier this year signed a definitive agreement to acquire Westblock, owners of an industrial scale cryptocurrency mining and hosting platform developed in partnership with the Navajo Tribal Utility Authority in New Mexico.
“The main considerations in forecasting a crypto mining business are the cost of power, the global hashrate, the hashrate of the miner fleet and the bitcoin price,” Thompson said. “The cost of power is more or less discoverable as it is disclosed by the Company and we also know if the power costs are fixed or variable. In Luxxfolio’s case the power costs are fixed. The miner fleet is also known, although the delivery schedule will not be perfect. The price of bitcoin and the global hashrate are the contentious factors.”
All told, the facilities have a total capacity of 15MW and a current installed capacity of 8MW, with another 7MW to be available by the end of Q1 2022 after some infrastructure investments are completed. In terms of mining capacity, Luxxfolio operates at a hashrate of ~131 PH/s, with announced machine orders that will result in about 360 PH/s at the end of July 2022 if deliveries are on schedule.
In December, Luxxfolio closed $9.5 million in bought deal financing at $0.70/share, allowing the company to meet the demands of announced power capacity plans, machine orders and immersion capex.
“This oversubscribed offering includes a broad group of global institutional investors including a strong retail presence in Canada,” said Luxxfolio Chair Kelly Klatik in the company’s December 7 press release. “These funds will allow our management team to be opportunistic on capital projects and provide us with much greater flexibility to HODL our present and future production of Bitcoin and Ether supply as we continue to expand our hash rate in 2022.”
After the company reported $1 million in revenue in fiscal 2021 (year end August 31), Thompson projects the Bitcoin miner to start striking it rich in fiscal 2022 at $27 million, followed by a jump to a forecasted $43 million in 2023, marking a potential year-over-year increase of 59.3 per cent.
Of the company’s earnings, Thompson expects a significant chunk to be available as EBITDA, forecasting a 77.8 per cent EBITDA margin ($21 million) in fiscal 2022, followed by a projected 79.1 per cent margin ($34 million) in 2023.
Thompson’s valuation projections also present Luxxfolio positively, introducing an EV/Revenue metric of 1x for 2022 before dropping to a projected 0.6x in 2023; the EV/EBITDA metric is introduced at a 1.3x multiple in 2022, dropping to a forecasted 0.8x in 2023. From this perspective, Thompson notes that Luxxfolio trades favourably in comparison to Argo, the only small-cap in its peer group with estimates, which trades at 4.1x its 2022 EV/EBITDA multiple.
Luxxfolio also presents strongly from an EV/EH/share perspective, trading at EV/Future EH/s of US$57 on its 2022 estimates, paling in comparison to the small cap miners average of $US108/share, as well as the large cap miners average of US$226/share.
“The Company is not well known and only recently raised money from institutional investors, leading to a valuation disconnect versus the peer group,” Thompson said. “LUXX is trading at a discount to the small-cap peer group, which trades at a discount to the large-cap peer group. The larger miners have more buying power and generally are able to obtain machines at a lower cost versus the small-cap peers. Luxxfolio management have been methodical at machine acquisition and seem to be obtaining machines opportunistically through their channel at competitive prices.”
Luxxfolio has lost 20.8 per cent on its share value over the course of 2021, recently coming back down after hitting a high point of $1.06/share on October 21.