Crypto stock Luxxfolio is a Buy, says PI Financial

Cryptocurrencies are having a rough go of it but PI Financial analyst Kris Thompson is still loving Luxxfolio Holdings (Luxxfolio Stock Quote, Chart, News, Analysts, Financials CSE:LUXX), maintaining a “Buy” rating and $0.40/share target price for a potential one-year return of 185.7 per cent in an update to clients on Monday.

Vancouver-based Luxxfolio Holdings is a publicly traded vertically-integrated digital asset company which operates an industrial scale cryptocurrency mining facility in the United States, powered primarily by renewable energy, with a focus on the blockchain ecosystem and the generation of digital assets.

Thompson’s update comes after Luxxfolio received a $2 million investment from BIGG Digital Assets, with warrants that may lead to an additional $2.6 million investment. Luxxfolio is the latest crypto investment for BIGG, which has also put money into WonderFi (CEX/DEX), TerraZero (metaverse), ZenLedger (tax software) and LQwD (lightening network), making its crypto diversification push with $51 million available on its balance sheet.

“BIGG Digital Assets is a Canadian company that operates the licensed Netcoins cryptocurrency platform, and a compliance & forensics software division used by law agencies and businesses with crypto exposure,” Thompson said.

Under the terms of the agreement, Luxxfolio will issue 12.5 million common shares to BIGG at a cost of $0.16/share (14.4 per cent interest in the pro forma total basic outstanding share count), with an equal amount of warrants allowing BIGG to purchase another 12.5 million shares at $0.21/share over a two-year expiration period.

In addition, BIGG will be able to appoint one member to Luxxfolio’s board of directors as long as it maintains an equity interest of 10 per cent or greater, while BIGG will also maintain certain pre-emptive rights.

Alongside the investment from BIGG, Luxxfolio ended its second quarter of 2022 with $1.6 million in cash and $4.8 million in digital assets.

“We believe LUXXFOLIO can become a global leader in sustainable crypto mining, and has established an excellent beach head operation in New Mexico with significant expansion potential,” said Mark Binns, CEO of BIGG Digital Assets in a June 9 press release. “The team at LUXXFOLIO, led by Ken MacLean, have built deep relationships in the crypto mining community and have grown the business through multiple crypto pricing cycles.”

The announcement also brings about revisions to Thompson’s financial estimates, as a nine per cent lower Petahash/second forecast, along with a revised Bitcoin price of US$30,000 (previously US$40,000), Thompson forecasts a revenue drop for 2022 from $17.2 million to $14.8 million, which comes with an 82 per cent gross margin (previously 82 per cent), along with $6.2 million in EBITDA (previously $7.6 million) for a 42 per cent margin.

Looking ahead to 2023, Thompson forecasts the Bitcoin price to return to around US$40,000 with a slight rebound in Petahash/second (353, previously projected at 368) to knock total revenue down to $24.3 million (previously forecast at $25.3 million) while the gross margin remains at a projected 79 per cent. 

Meanwhile, Thompson forecasts a spike in the company’s EBITDA for 2023 from $10.6 million to $12.8 million, presenting an elevated margin of 53 per cent compared to the previous 42 per cent estimate.

“Our target EV/EBITDA multiple is now 3.5x (was 3.9x) F2023E leaving some room for additional dilution related to outstanding warrants,” Thompson said. “If Bitcoin rallies there is a lot of upside to our estimates and target.”

Luxxfolio’s stock price has languished to a 71.3 per cent loss in 2022, dropping off to its present low of $0.14/share after starting the year trading at $0.47/share.