Hut 8 Mining Corp.

Hut 8 Mining Corp. (TSX: HUT) is one of the biggest 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 Highlights:

• Technical Indicators are suggesting a potential upside: On the weekly price chart, the stock tested horizontal line breakout level of CAD 4.16 recently and bounced back from that level. Moreover, the stock is trading above the 50-days simple moving average (SMA), which is likely to act as a crucial support zone.              

Technical price chart of HUT, Analysis by Kalkine Group

• Significantly Undervalued: The stock of HUT is available at a discounted valuation as compared to the industry median on an NTM basis. A lower valuation suggests a higher growth potential in the coming days.

• Strong Profitability margins: The company enjoys a strong margins profile, as compared to the industry median. EBITDA and Operating margin stood at 36.90% and 90.20%, respectively compared to the industry median of 7.40% and -1.30%, respectively. Net Margin stood strong at 109.3% as compared to industry median of -4.7%.                              

Margin Comparison, Analysis by Kalkine Group

• Installation of High-performance computing capabilities: On May 25, the company installed new server hardware from Amulet Hotkey, which would be utilized in conjunction with the Nvidia GPUs. This is expected to offer smooth enterprise quality hardware, technical support, and a wide range of monitoring and control tools, which can execute the intensive workload. The recent instalment is in line with the company diversification strategy to drive immediate short and long-term revenue growth objectives for FY21.

Q1FY21 Financial Highlights:

• HUT impresses with its quarterly result, wherein the company posted quarterly revenue of CAD 32.5 million, compared to CAD 12.7 million in Q1FY20. The exuberant growth was driven by higher income from digital assets mined (CAD 30.557 million v/s CAD 12.739 million in pcp).
• Gross profit soared to CAD 12.13 million, from a loss of CAD 6.87 million in pcp, thanks to the elevated revenue and lower depreciation costs, partially offset by higher site operating costs (CAD 14.581 million v/s CAD 12.605 million in pcp).
• Operating income stood significantly higher at CAD 6.379 million v/s an operating loss of CAD 7.226 million in pcp. The quarter witnessed a surge in share-based payments (CAD 2.756 million v/s CAD 0.707 million in pcp), higher professional fees (CAD 0.654 million v/s CAD 0.121 million in pcp) and an increase in salary & benefit expenses (CAD 1.857 million v/s CAD 0.276 million in pcp).
• The group reported a net income of CAD 35.524 million, as compared to a loss of CAD 10.230 million in pcp.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: The company is exposed to the volatility in cryptocurrency price. A decline in the Cryptocurrency price would lead to a sluggish demand for the mined assets and would further dampen the company’s performance. 

Stock Recommendation:

The stock soared ~250% in the last one year, due to growing investors interest in cryptocurrencies. The group is a leading cryptocurrency miner, and hence, the stock price witnessed a havoc surge during the last one year. However, due to a fall in the cryptocurrencies’ price in the recent past, the stock corrected ~30% and ~55% in the last one month and three months, respectively. The stock delivered a strong performance in the first quarter of 2021 and the stock is available at a significant discount compared to the industry median. On the technical front, the stock closed above the 200-days simple moving average (SMA), which suggest a bullish trend. Technical indicators are suggesting a potential upside in stock as it recently bounced after testing the horizontal line breakout level. Based on technical analysis, the stock has support at CAD 4.3 level. However, the company’s performance would depend on the performance of cryptocurrencies. Prices of the cryptocurrencies recovered from the recent lows, and we expect the price to increase further. Hence, considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the last closing price of CAD 5.25 on May 26, 2021. We suggest the investors to take a position in the stock based on individual risk appetite as volatility in the stock could be very high as it has exposure to cryptocurrencies.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock if the price closes below the support level.

One-Year Technical Price Chart (as on May 26, 2021). Analysis by Kalkine Group.

H2O Innovation Inc.

H2O Innovation Inc. (TSXV: HEO) is a Canada-based company which provides water treatment solutions based on membrane filtration technology. The end users are municipal corporations, energy, and natural resources etc.

Key Highlights:

• Strong growth in cash flows: The group reported tremendous growth in the cash flows and posted net cash flows from operating activities at CAD 11.154 million in 9MFY21, v/s CAD 2.701 million, a year ago. The increase was driven by higher net income coupled with favourable working capital management. Notably, adjusted free cash flow increased to CAD 9.120 million in 9MFY21 v/s CAD 2.552 million in pcp.

• New Project win: On May 10, 2021, the company added two new projects and also renewed four Operation & Maintenance contracts in North America. The total contract is valued at CAD 3.3 million. The first project is related to the operation, maintenance, and management of the water treatment systems of a Municipal Utility District in Texas. While the second one includes the operation and maintenance of an effluent treatment facility at a large agri-food processing plant located in Calgary, Alberta.  Notably, these contracts are categorized as evergreen projects and augurs well for stable cash flows. 

• Focus on expansion across Latin America: The company is looking to increase its presence across the Latin American market through the recent acquisition of Genesys Membrane Products S. L., which is a H2O Innovation company having a presence in Chilie. The group expects this to boost the product portfolio while the company would further focus on strengthening the existing relationships and building new relationships with original equipment manufacturers across the LATAM region. 

Q3FY21 Financial Highlights:

• HEO announced its quarterly result, wherein the company posted revenue of CAD 39.155 million, v/s CAD 36.061 million in the previous corresponding period (pcp). The increase was driven by strong momentum from the WTS segment, while decent growth from both specialty products and O&M segments also supported the top-line.
• Adjusted EBITDA surged to CAD 4.513 million, from CAD 3.775 million in pcp. The growth was driven by higher revenues coupled with lower SG&A expense (CAD 6.497 million v/s CAD 6.777 million in pcp).
• Adjusted EBITDA margin grew to 11.5%, as compares to 10.6% in pcp, supported by lower selling general and administrative expenses (SG&A) as a percentage of revenue.
• The company’s net earnings were reported at CAD 2.062 million as compared to a net loss of CAD 3.097 million in pcp.

Q3FY21 Income Statement Highlights (Source: Company Report)

Risks: The performance of the company might be impacted due to a change in technology, entry of new players with value-added products at a competitive price leading to price competition and margin erosion etc.

Valuation Methodology (Illustrative): EV to EBITDA

Stock Recommendation:

The company falls under the utility sector, which is considered as the safe havens for investors due to the resilient business model. The company delivered improved cash flows amidst the challenging macro-environment. Moreover, the company entered into a potentially high growth market in Latin America. We have valued the stock using the EV to EBITDA based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have industry (Water & Related Utilities) median on an NTM basis. Based on technical analysis, the stock has a support at CAD 1.90 level. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the last closing price of CAD 2.36 on May 26, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.

One-Year Technical Price Chart (as on May 26, 2021). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

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