Hut 8 Mining Corp. (TSX: HUT) is one of the leading bitcoin miners in the world. The group has one of the highest installed capacity rates within the industry and is also a self-mined Bitcoin of any crypto miner or publicly traded company. 

Key Updates:

• Impressive operational update: For the month of January 2022, the company mined 308 Bitcoins (v/s 276 Bitcoins in December 2021), with an average production rate of 9.93 Bitcoin per day (v/s 8.9 Bitcoin/day in December 2021). Total Bitcoin balance held in reserve increased to 5,826 on January 31, 2022, increased from 5,518 on December 31, 2021. Installed operating capacity stood at 2.36 exahashes/second (EH/s), reflecting an increase of 17% over December 2021.

• Strong Profitability margins: The company enjoys a strong margin profile, as compared to the industry median. Notably, EBITDA margin and operating margin stood at 46.6% and 36.3%, respectively, in Q3FY21, higher than the industry median of 7.6% and negative industry median of 1.2%, respectively. Pretax margin stood strong at 35.2% as compared to the negative industry median of 6.7%. This indicates improved cost structure, which is a key positive as it provides higher operational efficiencies.

• Healthy balance sheet: The company has prudent capital management and reported a Debt/Equity ratio of 0.02x in Q3FY21, as compared to the industry median of 0.18x. This will help the company to outpace its peers during the rising interest rates environment.

• Management update: On February 17, 2022, the group appointed Josh Rayner to the post of Vice President, Sales, effective February 21, 2022.
  

Risks associated with the business:

The company witnessed a surge in input costs such as higher cost of sales and significantly higher general & administrative expenses. Continuation of the above trend is likely to impact the company’s cash flows and profitability.

Q3FY21 Financial Highlights:

Q3FY21 Income Statement Highlights (Source: Company Report)

• In Q3FY21, the company posted revenue of CAD 50.3 million, soared from CAD 5.7 million in Q3FY20. The vigorous growth was driven by strong self-mining economics, continued expansion of the mining capacity, operational up-time coupled with growth from hosting services.
• Gross profit stood at CAD 29.1 million, versus a loss of CAD 5.3 million in pcp, supported by higher income, partially offset by the elevated cost of revenue (CAD 21.2 million v/s CAD 11.0 million in pcp).
• The quarter witnessed a surge in general & administrative expenses of CAD 10.8 million v/s CAD 1.2 million in pcp, due to higher non-operational sales tax expense related to the growth capital investments, coupled with additional expenses related to new recruitment within the senior management team. However, operating income stood at CAD 18.2 million as compared to an operating loss of CAD 0.8 million in pcp, supported by higher gross profit.
• The group reported a net income of CAD 23.3 million, as compared to a loss of CAD 0.9 million in pcp. This was supported by higher operating income and higher finance income, partially offset by slightly higher finance costs and a foreign exchange loss.

 Valuation Methodology (Illustrative): Price to Earnings-based

Analysis by Kalkine Group

Stock Recommendation:

During 9MFY21, the company posted its income of CAD 115.9 million, significantly higher than CAD 27.7 million in pcp. This illustrates strong performance driven by the increased demand for digital asset mining. The stock has been valued by using the P/E based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Riot Blockchain Inc, Bitfarms Ltd etc., for the purpose. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 7.76 on February 28, 2022. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on February 28, 2022). Source: REFINITIV, Analysis by Kalkine Group 

Technical Analysis Summary

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest. 

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest. 

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices 

Note 1: The reference data in this report has been partly sourced from REFINITIV. 

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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