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Research Note - Ether Capital Corp. (ETHC:NEO,$2.37|BUY $4.00 TARGET) Solid Q2; Updating NAV Estimates

Ether Capital reported Q2/22 financial results this morning that were in line with our estimates. Ether Capital posted $1.1M in revenue in Q2, in line with our estimate of $1.1M. The revenue was made up of $393K from consulting and $689K from staking/securities income, compared to our estimates of $500K and $600K respectively. Adjusted EBITDA came in at $162K, below our expectation of $500K due to the increased salaries and benefits for the new employees. ETHC ended the quarter with 23,610 Ether, 20,512 Staked Ether, 460 Ether rewards, and $3.8M in cash. We continue to believe ETHC is heavily undervalued relative to its mark-to-market holdings, private investment in Wyre, and earnings power.

On July 8th, management confirmed that they are confident in ETHC’s revenue and liquid assets, despite the pullback in the broad crypto market. Management expects to remain profitable for the foreseeable future, a feat that not many public crypto companies can attest to. ETHC also announced that it plans to delay the staking of the final 10,000 ETH until the Ethereum Merge which is expected to take place this fall. Ether Capital plans to continue generating yield and will use the rewards to build out new businesses. ETHC confirmed that gross staking yields are now 4.65%, compared to the 5% we were expecting. After updating our model for the lower crypto prices and yields, we are expecting $1.3M in staking revenue in H2/22 and $3.1M in 2023 (full year of 30K ETH staked). As for ETHC’s consulting operations, the BTCC ETF now has $790M in AUM and ETHH ETF now has $330M in AUM, which will generate ETHC consulting revenue of $1.1M in 2023.

Management remains bullish on Ethereum’s transition to Proof of Stake and believes the merge will result in a rebound in ETH prices. We would like to remind readers that the introduction of EIP-1559 and the merge of the proof-of-stake system with the Ethereum mainnet brings the potential for much larger staking yields (>15%) based on transaction fee rewards being returned to ETH stakers (rather than miners). We believe Ether Capital is the best public instrument to play the Ethereum merge, given its mark-to-market holdings and exposure to staking. During the quarter, Ether Capital announced that its portfolio company Wyre has entered into an agreement to be acquired by Bolt Financial for $1.5B. Ether Capital invested US$1.5M in Wyre in December 2018. Approximately 89% of the consideration is expected to be paid in Bolt common shares over four years and the remaining 11% will be paid in cash over two years. ETHC believes there are materials risks to the valuation of Bolt’s common shares due to the decline in technology firm multiples over the last six months. News sources have reported that Bolt was recently valued at $5.5B vs. $11B in January; as such, we are lowering our Wyre valuation by approximately half.

ETHC currently trades at a 27% discount to its liquid holdings alone ($3.23/share). Given the various upcoming opportunities for ETHC to begin generating value beyond its NAV and generate positive free cash flow, we believe the stock should trade at a premium. We are maintaining our BUY rating and revising our target price to $4.00/share (previously $5.50/share) due to the lower crypto prices and Bolt valuation.

20220811 - M Partners - ETHC - Q2 Financials
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