CoinShares International — Q322 profitable, FTX impact manageable

CoinShares International (OMX: CS)

Currency in SEK

Last close As at 03/02/2023

SEK32.75

3.70 (12.74%)

Market capitalisation

SEK2,234m

Research: Financials

CoinShares International — Q322 profitable, FTX impact manageable

CoinShares International (CS) posted Q322 EBITDA of £6.4m vs £26.1m in Q321 as asset prices, trading volumes and volatility in digital asset markets remained subdued amid a persistent ‘crypto winter’. Having said that, the Q322 profit shows that CS can be profitable even in an adverse market environment. CS reported £4.5m in gains and income in its capital market infrastructure operations. Total comprehensive income of £20.0m (Q321: £26.2m) was assisted by FX gains on consolidation from a higher US$/£ rate. More recently however, the digital assets market has been shaken by the collapse of FTX and Alameda Research.

Milosz Papst

Written by

Milosz Papst

Director, Financials

Financials

CoinShares International

Q322 profitable, FTX impact manageable

Q322 results

Financials

17 November 2022

Price

SEK25.90

Market cap

SEK1,764m

SEK12.5250/£

Total equity (£m) at 30 September 2022

240.6

Shares in issue

68.1m

Free float

28.7%

Code

CS

Primary exchange

Nasdaq First North

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(21.5)

(34.1)

(70.1)

Rel (local)

(29.7)

(31.6)

(60.9)

52-week high/low

SEK89.8

SEK22.6

Business description

CoinShares International develops innovative infrastructure, financial products and services for the digital asset class. It manages and provides liquidity for exchange traded products and undertakes proprietary trading in digital assets. It also acquired a blockchain equity index business and a consumer-facing crypto company in 2021.

Next events

Q422 results

21 February 2023

Analyst

Milosz Papst

+44 (0)20 3077 5700

CoinShares International is a research client of Edison Investment Research Limited

CoinShares International (CS) posted Q322 EBITDA of £6.4m vs £26.1m in Q321 as asset prices, trading volumes and volatility in digital asset markets remained subdued amid a persistent ‘crypto winter’. Having said that, the Q322 profit shows that CS can be profitable even in an adverse market environment. CS reported £4.5m in gains and income in its capital market infrastructure operations. Total comprehensive income of £20.0m (Q321: £26.2m) was assisted by FX gains on consolidation from a higher US$/£ rate. More recently however, the digital assets market has been shaken by the collapse of FTX and Alameda Research.

Year end

Revenue (£m)

Adjusted
EBITDA* (£m)

Adjusted
EPS** (£)

DPS
(£)

P/E
(x)

Yield
(%)

12/20

18.4

22.1

0.28

0.00

7.4

N/A

12/21

80.9

121.7

1.64

0.00

1.3

N/A

12/22e

51.1

(6.5)

0.32

0.00

6.5

0.0

12/23e

39.0

20.3

0.13

0.00

15.7

0.0

Note: *Sum of revenue, income and gains from capital markets infrastructure and gains on principal investments less administrative expenses excluding D&A. **Total comprehensive income per share attributable to the shareholders of the parent.

CoinShares Physical inflows steady

CS’s asset management revenue came in at £10.1m in Q322 (versus £14.2m in Q222 and £18.4m in Q321) and its assets under management were £2.02bn at end-September 2022 (60% in the legacy XBT Provider products, 30% in the BLOCK index (ie equities platform) and 10% in CoinShares Physical) versus £1.66bn at end-June 2022 and £4.18bn at end-2021. Importantly, moderate net inflows (excluding seed assets) into CoinShares Physical products continued, reaching £127m year to date (of which c £22m was in Q322), suggesting steady interest in its institutional-grade exchange traded products (ETPs). Management highlighted that CoinShares Physical was the leader in bitcoin (BTC) and Ether (ETH) net inflows in Q322 across Europe. CS launched one new product during the quarter, the CoinShares Physical Staked Algorand ETP.

XBT Provider outflows moderating

Meanwhile, net outflows from legacy products slowed down markedly to US$9m in Q322 (versus US$132m in Q222 and US$246m in Q122), with the number of individual holders at 77,000 versus c 72,000 at the time of the Q321 results release. This may suggest diminishing volumes of profit realisations from earlier unit holders who bought before 2021, coupled with interest from new retail investors. The BLOCK index saw only minor net outflows of US$2.6m in Q322 (after net inflows of US$35m in H122).

Valuation: Reduced to reflect FTX/Alameda impact

CS’s total direct exposure to FTX is US$30.3m (none to Alameda Research), which we conservatively assume will be entirely lost and reflected this in our CS valuation. Coupled with more muted CSCM gains/income forecasts, this translates into a CS fair value of SEK70.0 per share (down from SEK80.0 previously).

CSCM with moderate gains/income in Q322

Despite limited arbitrage opportunities and low volumes in the crypto markets, which led to muted activity in terms of delta neutral strategies and liquidity provisioning, its capital markets infrastructure arm, CoinShares Capital Markets (CSCM) generated gains and income of £4.5m in Q322 (vs £8.4m in Q321). This was assisted in particular by decentralised finance (DeFi) activities (£1.5m) and fixed income operations (£1.2m). However, we note that the company has been unwinding its DeFi positions in recent months (as yields declined while counterparty risk increased across the sector), with a mere £25.2m balance left in DeFi activities at end-September 2022.

Management highlighted that the company’s proprietary trading became more active towards the end of August and into September, including the deployment of trading strategies around the Ethereum Merge to capture the value of the forked token (ETHPoW) and the basis on long futures positions. This was partly offset by expenses related to CS’s increased use of futures to hedge its XBT Provider exposure (encouraged by low funding rates), with cash freed up in the process being deployed to generate a yield.

Exhibit 1: Q322 results highlights

£m, unless otherwise stated

Q322

Q222

Q122

Q421

Q321

Revenue, of which:

10.8

13.9

18.0

25.8

18.4

XBT Provider

9.1

13.0

16.3

24.4

17.5

CoinShares Physical

0.6

0.6

0.4

0.5

0.2

Equities platform

0.4

0.6

0.5

0.6

0.6

B2C*

0.3

(0.1)

0.7

0.3

-

Capital market infrastructure income/gains, of which:

4.5

(11.4)

10.2

16.2

8.4

Liquidity provisioning

0.4

1.6

2.0

2.4

1.7

Delta Neutral Trading Strategies

0.3

(1.3)

0.6

5.3

2.6

Fixed income activities

1.2

0.8

1.2

3.5

3.1

DeFi

1.5

4.9

6.3

3.6

-

Other

1.1

(17.5)

0.2

1.5

1.0

Principal investment gains/(losses)

(0.1)

(5.1)

(0.1)

0.7

4.8

Adjusted administrative expenses

(8.3)

(5.8)

(9.2)

(10.0)

(5.7)

Adjusted EBITDA

6.4

(8.2)

18.7

32.9

26.1

Adjusted EBITDA margin (%)

42.5

N/A

66.9

77.0

82.0

Depreciation and amortisation

(0.8)

(0.7)

(0.6)

(0.5)

(0.6)

Finance expense

(0.9)

(2.4)

(2.2)

(2.9)

(1.5)

Income taxes

(0.3)

(0.1)

0.1

0.3

(0.4)

Currency translation differences

15.5

11.3

4.1

(0.4)

2.6

Total comprehensive income

20.0

(0.1)

20.2

29.5

26.2

Source: Company data. Note: *Acquired in December 2021.

FTX/Alameda Research collapse will have significant ramifications for the crypto markets

Until recently FTX was one of the top centralised crypto exchanges globally, while Alameda Research was one of the largest principal trading businesses and market makers in the digital assets space. Both businesses were founded by Sam Bankman-Fried (SBF), one of the key figures in the crypto space in recent years. Last week, both FTX and Alameda Research filed for Chapter 11 bankruptcy after FTX suspended withdrawals on 8 November amid an apparent liquidity crunch. Moreover, FTX announced that it had suffered from a hack soon after filing for bankruptcy.

CS recently announced its total direct exposure to FTX is US$30.3m (c £26.6m), while having no exposure to Alameda Research. We conservatively assume all these funds will be lost (even though it is possible that some part will eventually be recovered) and thus reduce our assumptions in terms of CS’s resources available for its capital markets infrastructure operations. Importantly, the FTX exposure is entirely attributable to CS’s proprietary assets, which means that XBT Provider and CoinShares Physical noteholders remain unaffected by the FTX collapse. CS continues to provide real-time attestations of the assets backing these products in partnership with Armanino.

Beyond the direct loss from holding assets on the FTX exchange, CS may be affected by the consequences of this high-profile failure of top players for the entire digital assets industry. It is likely to trigger an even greater trust crisis than the bankruptcy of Three Arrows Capital, Voyager Digital and Celsius, as well as the UST/Luna collapse earlier this year. It may also result in a liquidity crunch and bankruptcies of other industry participants with high exposure to FTX and/or Alameda Research. All this could delay broader digital assets adoption (limiting near-term ETP inflows) and result in CS’s even greater cautiousness in its CSCM operations (limiting potential gains and income).

In response to the recent announcement by Genesis Global Capital (the lending arm of Genesis Global Trading) that it is temporarily suspending redemptions and new loan originations following FTX’s collapse, CS confirmed that it has no exposure to Genesis at present.

CS’s capital position remains robust

As at end-September 2022, CS had a net amount due from brokers of £70.1m at end-September 2022 versus £38.1m net due from brokers at end-June 2022 and £205.2m net due to brokers at end-March 2022. The more muted activity within its capital markets infrastructure business meant that CS significantly reduced the utilisation of its credit lines with brokers, which resulted in a lower interest expense. However, these credit facilities remain available and can be drawn by CS as new trading opportunities arise. CS also had cash at bank of £12.4m at end-Q322. Finally, we estimate that its accrued management fees related to XBT Provider (which will be released in cash to CS once investors redeem their units) stood at c £165m at end-September 2022. Given the above and its total equity of £240.6m as at end-September 2022, we believe CS’s balance sheet is in a good position, even after accounting for the potential US$30.3m loss arising from the FTX exposure.

Forecast revisions

While it is yet to be seen how CS will account for its FTX exposure, we assume that the entire £26.6m exposure will be written down in Q422 (with the loss reflected in ‘other’ capital market infrastructure income/gains, see Exhibit 2). Moreover, we reduce our CSCM income/gains forecasts for the following years to reflect a more cautious approach of CS, as well as the more limited capital available for trading. On the other hand, we have raised our management fee assumptions for XBT Provider fees due to the recent limited net outflows.

Exhibit 2: Summary of forecast revisions

 

FY21

FY22e

FY23e

FY24e

FY25e

 

Actual

Old

New

diff (%)

Old

New

diff (%)

Old

New

diff (%)

Old

New

diff (%)

Revenue, of which:

80.9

49.3

51.1

3.7

36.1

39.0

8.1

49.1

53.5

9.0

73.2

83.8

14.5

XBT Provider

78.5

43.1

45.0

4.4

25.2

28.2

12.1

30.5

34.8

14.1

37.0

46.2

24.9

CoinShares Physical & other *

0.9

3.0

3.0

(0.8)

7.6

7.3

(3.7)

14.3

14.2

(0.7)

30.9

32.1

3.8

Block index

1.2

1.9

1.9

(1.1)

1.9

2.0

5.6

2.5

2.7

5.6

3.0

3.2

5.6

B2C

0.3

1.2

1.2

(4.0)

1.4

1.5

2.9

1.8

1.8

2.9

2.3

2.4

2.9

Capital market infrastructure income/gains, of which:

62.1

6.2

(20.2)

(426.6)

35.9

22.7

(36.9)

44.0

31.3

(29.0)

54.9

43.6

(20.5)

Liquidity provisioning

13.8

6.6

5.1

(22.5)

5.5

4.7

(15.3)

5.7

5.9

5.2

4.6

5.5

19.5

Delta Neutral Trading Strategies

27.2

0.5

0.9

69.5

16.0

8.4

(47.6)

21.7

12.5

(42.2)

30.7

19.9

(35.3)

Fixed income activities

10.9

2.5

3.7

46.5

2.5

3.7

46.5

2.5

3.7

46.5

2.6

3.8

46.5

DeFi

3.6

13.9

13.0

(6.6)

11.5

4.5

(61.0)

13.8

7.6

(44.8)

16.6

13.0

(21.7)

Other

6.6

(17.4)

(42.9)

NM

0.3

1.4

320.4

0.3

1.4

320.4

0.3

1.5

320.4

Principal investment gains/(losses)

9.6

(5.3)

(5.6)

NM

0.0

0.0

N/A

0.0

0.0

N/A

0.0

0.0

N/A

Administrative expenses excl. D&A

(31.1)

(30.3)

(31.5)

4.0

(40.2)

(41.0)

2.2

(46.8)

(49.2)

5.0

(55.0)

(58.3)

6.0

Adj. EBITDA

121.7

20.0

(6.5)

NM

31.5

20.3

(35.5)

45.5

34.8

(23.5)

71.3

67.3

(5.6)

Total comprehensive income

110.5

18.2

23.0

26.3

20.3

9.6

(53.0)

33.7

22.1

(34.5)

57.0

53.4

(6.2)

Source: Company data, Edison Investment Research. Note: *Includes fees from CoinShares Physical, 3iQ and Invesco.

Exhibit 3: Financial summary

Year ending 31 December
£000’s unless otherwise stated

FY18

FY19

FY20

FY21

FY22e

FY23e

FY24e

FY25e

INCOME STATEMENT

 

 

 

 

 

 

 

 

Revenues

10,549

11,331

18,389

80,892

51,090

39,023

53,477

83,780

Administrative expenses

(10,927)

(9,284)

(14,312)

(32,167)

(33,765)

(43,266)

(51,435)

(60,520)

Other operating income

4,811

529

607

11,427

18,180

19,089

20,043

21,046

Profit/(loss) on financial instruments

519,988

(64,553)

(1,398,436)

(2,236,196)

1,857,710

(1,264,941)

(828,117)

(2,426,481)

Realised gain/(loss) on investments

(1,074)

(405)

942

5,287

(6,028)

0

0

0

Adjusted EBITDA

12,993

11,171

22,113

121,688

(6,472)

20,319

34,764

67,298

EBIT

523,347

(62,382)

(1,392,810)

(2,170,757)

(13,331)

12,584

25,732

56,089

Finance income

693

931

3,793

10,905

11,386

5,490

6,786

8,963

Finance expense

(148)

(404)

(1,191)

(6,810)

(6,612)

(8,522)

(10,431)

(11,636)

Pre-tax profit

523,892

(61,855)

(1,390,208)

(2,166,662)

(8,557)

9,553

22,087

53,417

Income taxes

(230)

(269)

(401)

(1,284)

0

0

0

0

Net income

523,662

(62,124)

(1,390,610)

(2,167,946)

(8,557)

9,553

22,087

53,417

Total comprehensive income

14,407

8,914

18,419

114,346

22,953

9,553

22,087

53,417

Adjusted EPS (diluted, £)*

N/A

N/A

0.28

1.64

0.32

0.13

0.31

0.74

DPS (£)

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

BALANCE SHEET

 

 

 

 

 

 

 

 

Property, plant and equipment

214

376

223

510

510

577

714

922

Digital assets

N/A

N/A

N/A

N/A

2,495

2,495

2,495

2,495

Intangible assets

0

7

20

19,781

18,908

18,035

17,162

16,289

Investments

6,158

5,585

3,626

24,501

41,304

41,304

41,304

41,304

Long term receivables and other

15

323

329

581

1,360

1,360

1,360

1,360

Non-current assets

6,387

6,290

4,199

45,372

64,577

63,772

63,035

62,371

Trade and other receivables

9,350

27,011

62,274

1,075,971

438,965

760,790

963,430

1,628,161

Digital assets

217,521

427,524

1,826,695

2,736,481

1,073,415

1,776,506

2,346,467

4,352,445

Cash at bank

32,897

2,350

2,266

11,088

18,804

20,096

27,328

65,899

Amounts due from brokers

N/A

39,405

66,518

118,976

74,795

109,000

146,921

278,813

Current assets

259,767

496,290

1,957,752

3,942,516

1,605,978

2,666,391

3,484,146

6,325,318

Total assets

266,154

502,580

1,961,951

3,987,888

1,670,555

2,730,163

3,547,182

6,387,689

Share capital

2,214

2,215

31

34

34

34

34

34

Share premium

111

111

2,387

30,781

30,781

30,781

30,781

30,781

Other reserves

104,322

168,813

1,209,630

667,846

699,356

699,356

699,356

699,356

Retained earnings

(68,003)

(125,795)

(1,155,551)

(497,727)

(506,284)

(496,731)

(474,644)

(421,227)

Total equity

38,644

45,343

56,497

200,934

223,887

233,440

255,527

308,944

Trade payables and other liabilities

227,469

419,340

1,792,936

3,491,612

1,246,583

2,179,992

2,938,413

5,576,251

Amounts due to brokers

N/A

37,631

112,121

292,708

199,453

316,099

352,610

501,863

Lease liabilities

0

0

0

0

632

632

632

632

Current tax liabilities

42

266

398

2,635

0

0

0

0

Current liabilities

227,510

457,237

1,905,454

3,786,955

1,446,668

2,496,724

3,291,655

6,078,746

Non-current liabilities

0

0

0

0

0

0

0

0

Total equity and liabilities

266,154

502,580

1,961,951

3,987,888

1,670,555

2,730,163

3,547,182

6,387,689

Ratios

 

 

 

 

 

 

 

 

Adjusted EBITDA margin (%)

52.1

54.0

62.8

85.1

(21.0)

32.9

41.0

52.8

Adjusted net margin (%)

59.4

38.4

47.6

80.0

74.3

15.5

26.1

41.9

Source: Company data, Edison Investment Research. Note: *Total comprehensive income per share.


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London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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Australia

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United Kingdom

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United States

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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