Input Capital Corp: One Year Later – An Annual Review [Part III] by Above Average Odds Investing
Editors Note: While I initially started cobbling together part 3 a couple of weeks ago prior to the January 6th press release (see the link below), unfortunately the stock proceeded to shoot up ~15% on something like 10x the average daily volume on the news. Yet given an inexplicable 8% selloff a few days after in the face of what I believe to be a legitimate “game changer,” not to mention a major de-risking event, I decided to go ahead and post what remains for those of you who continue to be interested in the longer-term story at Input Capital – with promises of bringing it all together come next week for part 4.
Keep in mind that while normally I’d take the time to update part 3 prior to posting, due to an unusually busy schedule over the next week I simply don’t have the time. In fact, I haven’t edited it much at all at this point and it’s probably twice as long as it would be if I had the time to refine it the way I’d initially intended. Regardless, hopefully members will find it a worthwhile read despite these shortcomings. I think it will be worth the effort – and again, expect a fully up to date part 4 the week after next.
At any rate, the positive initial reaction was definitely warranted and largely due to Input’s ability to deploy another ~$16.9m into an additional 26 canola streams in the month of December alone, a data point that is particularly notable in a number of key respects.
For example, the announcement gets the company almost half way to their full year (2015) guidance of $40m, a mere one month into “deployment season”, a period that typically spans from January to May. This was a surprise to say the least given farmers are typically focused on their operations in the October through December period, not to mention the fact that last year the company didn’t deploy any cash until well into January. Point being, the Jan. 6th update may be the most important event in the company’s history, as it highlights the huge demand for Input Capital’s services as well as the long-term viability of its high quality business model. It also hints at what I’ve believed for some time. Namely, that the size of Input’s total addressable market will prove to be much larger than what is currently reflected in the company’s current quote.
As always time will tell.
Also, if what follows below comes off as disjointed, keep in mind that certain sections of the original piece have been cut given they don’t reflect the latest numbers, in particular the valuation section and a few others that imo were to “early stage” to bother including. Nonetheless, what remains should be plenty sufficient to drive home why I continue to believe the stock is materially mispriced, even if certain parts are somewhat dated.
So with that, enjoy!
1 Year Later – An Annual Review
So what’s new?
At a high level, not much. INP remains the world’s first and only agricultural commodity streaming company (no natural comps) focused on providing farmers with upfront cash in lieu of a multi-year, high-return Canola royalty stream. Streams characterized as much by their ability to mitigate risk as by their ability to generate outsized IRR’s. (check out the Q&A at the end of part 2 for some color in terms of the multi layered and essentially government guaranteed downside protection)
Furthermore, armed with what is now a proven model, a hugely lucrative win/win value proposition, roughly $60m in cash to deploy at highly attractive returns, not to mention an almost stupidly large addressable market relative to its current stream count, Input’s potential to sustain a high rate of increasingly profitable growth in both the short and long-run is utterly tremendous. Yet the company remains poorly understood and substantially under-appreciated.
Granted, I suppose this shouldn’t be all that surprising in that Input Capital, like most unique, newly public businesses with no real public or private peers, is naturally a strong mis-pricing candidate. Names like GOOG, MERC, MA and MCO come to mind, all of which looked statistically expensive through the rearview coming out of the gate but turned out to be anything but – indeed, they proved to be tremendous bargains for those willing to look 12 to 24 months out. I think a similar dynamic is playing out here.
In any case, slow canola realization from the 2013 harvest and a variety of other temporary issues – such as an abnormally harsh winter, logistical issues that affected rail availability (congestion resulted in delayed Canola shipments due to a lack of takeaway capacity) and a falling canola price – ultimately drove the stock back below last summer’s $2.30 secondary issuance. The thing is, at~$2.12 per share, I’d argue the present set up offers the single most attractive risk/adjusted reward since the company went public in the middle of 2013.
For starters, Input Capital has started to generate cash as well as proven itself in a variety of key ways over the last year. Whether we’re talking about basic blocking and tackling like arbitraging canola pricing for partners, sourcing capital on increasingly attractive terms, deploying that capital back into new streams at even better terms, etc. it seems pretty clear the business has come along way. Indeed, the only question marks that remain revolve around the absolute size of Input’s addressable market and how quickly the company can scale, two questions I intend to address in detail throughout this update.
Regardless, the business has largely turned the corner and management continues to execute on all fronts. The result is an investment opportunity that has been substantially de-risked, which is why I think it makes a ton of sense to use this latest pullback to either initiate or add to a position. After all, if my appraisal of the situation is even in the ballpark of being correct, time to get in cheap may be running out.
Game Changing Inflection Point
Perhaps the most surprising aspect of the current set up is that “capital deployment season” is right around the corner, and yet the market appears unwilling to assign any credit for the step change in cash flow that should result if management executes according to plan.
Realize that INP will be deploying another $40m + into new streaming contracts at IRR’s of 20%+ over the next few months. Contracts mind you that (at current canola prices) should not only lower INP’s all in costs but come with substantial embedded optionality should pricing ever revert to a level more commensurate with long-term supply demand dynamics. And that’s to say nothing of the fact that the move will effectively double the value its existing streaming portfolio in one fell swoop, further diversifying it’s revenue streams and the geographic diversity of the business.
Point being, I think success on this front should be a “game changer” for INP in the truest sense of the term, effectively demolishing any and all concerns surrounding demand for Input Capital’s services and the scalability of it’s high quality business model.