“Edison’s accessible and high-quality research gives us the opportunity to communicate an independent perspective of Tyman to a wide variety of potential stakeholders.”
Currency in SEK
Last close As at 26/05/2023
SEK0.03
— 0.00 (−6.90%)
Market capitalisation
SEK245m
Research: TMT
In Q421 Arcane Crypto reduced its EBITDA loss to SEK3.4m from SEK10.4m in Q420, on the back of higher trading volumes and the gross margin of its crypto broker Kaupang Krypto, as well as the launch of bitcoin (BTC) mining in October 2021. The latter is now fully ramped up after deployment of the second batch of miners in Q122. These operations generated a robust average gross margin of 65% in Q421. However, the subsequent BTC price decline from its all-time high in November 2021, coupled with high electricity prices in Norway, means Arcane Crypto now expects to be close to cash flow neutral in the near term (compared to previous expectations of being cash flow positive from Q122 onwards).
Arcane Crypto |
Crypto trading volumes picked up in Q421
TMT |
Spotlight - Update
16 March 2022 |
Share price graph
Share details
Business description
Bull
Bear
Analyst
Arcane Crypto is a research client of Edison Investment Research Limited |
||||||||||||||||||||||||||
In Q421 Arcane Crypto reduced its EBITDA loss to SEK3.4m from SEK10.4m in Q420, on the back of higher trading volumes and the gross margin of its crypto broker Kaupang Krypto, as well as the launch of bitcoin (BTC) mining in October 2021. The latter is now fully ramped up after deployment of the second batch of miners in Q122. These operations generated a robust average gross margin of 65% in Q421. However, the subsequent BTC price decline from its all-time high in November 2021, coupled with high electricity prices in Norway, means Arcane Crypto now expects to be close to cash flow neutral in the near term (compared to previous expectations of being cash flow positive from Q122 onwards).
|
Historical financials
Source: Company data. Note: *Includes -SEK126.9m one-time accounting effect arising from the reverse takeover. |
Kaupang Krypto’s revenue up 85% versus Q321
According to Arcane Crypto, BTC trading volumes increased c 22% in Q421 versus Q321, with several of its portfolio companies seeing an even stronger pick-up in gross turnover (Kaupang Krypto +85%, Trijo +78%, LN Markets +104%), albeit from a relatively low base given the early stage of their development. Meanwhile, Puremarkets expects trading on its interbank wholesale marketplace to commence in H222, while the exchange traded product (ETP) based on Arcane Assets’ cryptocurrency fund should be launched in Q222, according to management.
Risk of ‘crypto winter’ higher, but adoption continues
While digital asset prices retraced visibly from their peak in November 2021, we are still not assuming a crypto bear market similar to the one in 2008 in our base scenario for 2022 given the continued progress in digital assets adoption and a return to net inflows to related investment products after a temporary period of net outflows in late-December 2021/early January 2022 (based on CoinShares International data). Arcane Crypto remains committed to supporting continued digital asset adoption by further development of its unified platform, an API-driven approach, and building trust and distribution through its market-leading research.
Valuation: LTM share price decline of c 73%
We refrain from valuing the Arcane Crypto group due to its early development stage. However, as a broad reference point, we note that the subscription price in the directed issue completed in August 2021 was SEK0.203 per unit (consisting of one share plus one warrant).
Q421 gross profit driven by brokerage and mining
Arcane Crypto reported a Q421 net loss of SEK12.6m, somewhat higher than the SEK9.5m loss in Q420. However, it was able to reduce its EBITDA loss to SEK3.4m (versus SEK10.4m in Q420). Its Q421 revenue stood at SEK148.7m versus SEK1.1m in Q420, predominantly reflecting the gross turnover of Kaupang Krypto (SEK138.9m) acquired in March 2021, with the balance attributable to BTC mining operations (Arcane Green Data), the fund management services to Arcane’s cryptocurrency fund (Arcane Assets), retail exchange Trijo and Arcane Research.
Arcane Crypto had cash and bank balances of SEK19.3m at end-2021, broadly in line with SEK17.9m at end-2020. During the year, its negative operating cash flow of SEK37.1m and net cash outflow for investments of SEK88.3m (primarily covering the acquisition of stakes in Kaupang Krypto, Trijo and LN Markets, as well as crypto mining equipment) was mainly financed through two private placements totalling SEK110.9m and some minor borrowings of SEK17.5m.
Exhibit 1: Q421 and FY21 results highlights
SEK000s |
Q421 |
Q420* |
FY21 |
FY20* |
Revenue |
148,684 |
1,062 |
332,239 |
1,941 |
Other operating income |
246 |
162 |
386 |
162 |
Total revenue |
148,930 |
1,224 |
332,625 |
2,103 |
Cost of goods sold |
(136,280) |
0 |
(304,837) |
0 |
Personnel costs |
(7,617) |
(2,949) |
(24,063) |
(8,992) |
Other external expenses |
(8,416) |
(8,633) |
(25,694) |
(10,923) |
EBITDA |
(3,383) |
(10,358) |
(21,969) |
(17,812) |
D&A, including write-downs on intangibles |
(8,354) |
(15) |
(11,499) |
(66) |
EBIT |
(11,737) |
(10,373) |
(33,468) |
(17,878) |
Profit from participation in associated companies |
(1,540) |
(411) |
(5,490) |
37 |
Interest income and other financial income |
1,837 |
1,173 |
4,122 |
1,193 |
Interest expenses and other financial costs |
(1,128) |
78 |
(128,604) |
(228 |
Profit before tax |
(12,568) |
(9,533) |
(163,440) |
(16,876) |
Income taxes |
0 |
0 |
0 |
0 |
Net income |
(12,568) |
(9,533) |
(163,440) |
(16,876) |
Adjusted net income** |
(12,568) |
(9,533) |
(36,487) |
(16,876) |
EPS (diluted, SEK) |
(0.001) |
(0.018) |
(0.019) |
(0.031) |
Source: Company data; Note: *Arcane Crypto results. **Adjusted for -SEK126.9m one-time accounting effect arising from the reverse takeover.
Kaupang improving trading volumes and gross margin
According to our calculations, Arcane Crypto’s gross profit was SEK12.7m in Q421, of which c SEK5.5m was attributable to Kaupang Krypto. This implies a solid gross margin of 4.0% (versus 2.0% in Q321 and 2.5% in Q221), which we understand was driven by: 1) the acquisition of new FX partners; 2) negotiation of better terms with liquidity providers; and 3) additional income from market making. Kaupang saw a significant 85% y-o-y increase in gross turnover in Q421 versus a 22% y-o-y BTC volume increase across the broader crypto markets, according to Arcane Crypto. The broker also experienced a gradual increase in both average order size and customer base on a month-on-month basis throughout Q421.
BTC mining operations now fully ramped up
Arcane Green Data generated Q421 revenue of SEK8.3m at a 65% gross margin, implying a gross profit of c SEK5.4m. Arcane Crypto’s BTC mining operations were launched in October 2021 based on the first batch of 352 application-specific integrated circuits (ASICs) representing a hashrate of c 39 petahash per second (PH/s), with the second batch (with a hashrate of 36 Ph/s) delivered as planned in Q122. We estimate that at the current BTC price of c US$39,000 and hashrate of c 200 exahash per second (EH/s), Arcane Green Data should generate annual revenue of c US$5.0m (or c SEK48m). Based on our conversation with management, we understand that the company is currently selling all mined BTC immediately after receiving block rewards. However, amid the recent decline in the BTC price from its all-time high in November 2021, the Arcane Crypto group now expects net cash flow to be close to neutral (ie slightly negative or slightly positive) in the near term, compared to previous expectations of becoming cash flow positive from Q122 onwards.
We note that while Arcane Green Data generates a robust gross margin in absolute terms, it is negatively affected by high spot electricity prices in Norway. Management highlighted that at an electricity price of SEK1.0 per kilowatt-hour (kWh) and current market conditions, its cost of mining stands at SEK167k (ie c US$16.7k) per BTC. This suggests that it is positioned relatively high on the cost curve versus other listed BTC miners. We estimate that at the above-mentioned electricity price, the business’s gross margin is currently c 54%.
ETP based on Arcane Assets’ fund to be launched in Q222
Management highlighted that Arcane Assets is close to finalising the structure of an ETP based on its cryptocurrency fund with Valour Structured Products, with the latter receiving approval from the Swedish regulator on its base prospectus (which includes the above-mentioned ETP). Consequently, Arcane Crypto expects the launch of the ETP in Q222, providing an important distribution channel for the hedge fund. While the European ETP market is currently dominated by single-asset ETPs, mostly those based on BTC and Ethereum (ETH), with multi-asset ETPs representing c 4% of total AUM (according to our estimates), we expect the latter to grow their market share in the coming years as investors realise the need to include a broader range of digital assets in their portfolios. Based on existing multi-asset ETPs, we expect the ETP launched by Valour and Arcane Assets may initially attract funds in the single- to mid-double-digit million-euro range (although probably closer to the lower end of this range at launch).
Trijo introducing trading fees
The retail crypto exchange Trijo saw a 78% sequential increase in trading volumes in Q421 which, according to Arcane Crypto’s management, was stimulated by: 1) a revised fee structure; 2) integration with the payment service provider Trustly; and 3) the launch of Trijo Autopilot for regular, automatic saving in BTC, ETH and Litecoin. While the company initially considered moving to a brokerage model based on spreads (similar to Kaupang Krypto), it recently introduced a trading fee schedule starting at 0.5% (previously, it did not charge trading fees to stimulate userbase growth). Consequently, it generated revenue of SEK741k in Q421 versus SEK525k in Q321. Nevertheless, Arcane Crypto continues to work on a unified operational and infrastructure framework for Kaupang and Trijo, and also working with Kaupang on improving its liquidity.
Trading on the Pure Digital platform expected to start in H222
With respect to holdings accounted for at equity (which in aggregate generated a loss of SEK1.5m in Q421 versus a loss of SEK0.4m in Q420), Puremarkets continues regular talks with its consortium of tier one investment banks related to the company’s interbank wholesale marketplace Pure Digital, with trading expected to commence in H222. On 1 March 2022, Puremarkets announced a partnership with Cobalt covering FX and digital asset risk and settlement infrastructure. LN Markets (a derivatives trading platform leveraging the Bitcoin Lightning Network) had trading volumes of US$120m in Q421 versus US$53m in Q321 and experienced a continued increase in its userbase (up 33% q-o-q). We note that Arcane Crypto decided to sell its 45% stake in the market maker and liquidity provider Alphaplate in January 2022 (the business generated an estimated Q421 profit of c £105.1k).
|
|
Research: Consumer
Greggs has demonstrated a strong trading recovery through FY21, which gave management confidence to accelerate its Next Generation Greggs growth strategy with the aiming of doubling revenue by FY26. The accelerated growth prospects reflect a combination of better opportunities in the property market due to COVID, helped by Greggs’ innovation in store formats, and pushing ahead with developing revenue in new channels and underpenetrated dayparts, which have trialled successfully. The growth will be supported by further menu development, where Greggs has a strong track record of innovation, and a greater focus on increasing customer loyalty. Our DCF-based valuation is £31.60 per share.
Get access to the very latest content matched to your personal investment style.
