Input Capital Corp: “A Field of Streams” by Above Average Odds Investing
Editors Note: This is the first of a four part series on Input Capital, where the first three posts will be published today with the finale heading your way towards the end of next week. Note that the original thesis outlined below was purchased at C$1.59 in October of last year, with the second posted shortly thereafter at ~C$1.80.
That in mind, naturally certain aspects covered in parts 1 and 2 such as the stated stock price, f/d share count, implied valuation, cash on the balance sheet, and so on are all somewhat dated, and thus will need to be reworked for anyone that’s new to the story here. At least for those of you who’d rather not wait until next week. Even so, one thing remains the same – Input remains a grossly mis-priced and under appreciated high quality business on the cusp of a multi year period of sustained super compounding. So while the stock has run up quite a bit since I took a position, the reality is that Input offers a far better risk/reward today than at perhaps any other point within its relatively short life as a publicly traded company.
In fact, earlier this month the company announced a number of details that taken together, have not only brightened Input’s longer-term prospects but materially de-risked the business in the process. And yet the market barely noticed, sending the stock up some 15% on roughly 10x normal volume – only to give back about half of those gains since. At any rate, while I’ll dive into these latest developments in detail in a bit, for now let’s keep “first things first” and start at the very beginning to get a better feel for the business and it’s ultimate potential.
So, readers meet Input Capital. Input Capital, meet readers. My hunch is some of you will become fast friends – not to mention make an enormous amount of money together over the next 2-3 years and even then, that’s just the beginning. Indeed, this owner operated snowball is just getting started.
You can mark my words on that!
****Part 1 – A Field of Streams
If you build it, they will come . . .
In the constant hunt to bring you recommendations worthy of your hard-earned investment dollars, your editors couldn’t be more pleased to bring you this month’s recommendation: Input Capital Corp (CVE:INP).
Input Capital is the world’s first agricultural commodity streaming company. Think of it as the Silver Wheaton (SLW) of farming. If you’ve never heard of it, don’t worry. Input’s initial public offering was only two months ago. Most investors don’t even know it exists.
What does Input do, exactly?
Simple: It offers money to farmers to help them finance their farms and become more productive, and in return, Input gets a “stream” on these farmers’ future crop production. Input buys the canola after the harvest at a predetermined and heavily discounted price. Input’s profit is the difference between the price it pays the farmer and the price canola trades at in the market.
This is a great deal for farmers, as it not only provides them with some much needed flexibility and upfront cash, but productivity-improving expertise critical to optimizing the profitability of their farms. The end result is a much more productive farmer. Which is just a fancy way of saying a farmer with a lot more money than he or she would have had absent partnering with Input. Of course, Input makes out like a bandit too. After all, its average return on invested capital for these “streams” should clock in at ~30% + over a full cycle, but let’s not get ahead of ourselves here. Better to start with a high level walk on the mechanics of these deals for illustrative purposes and we can go from there.
That in mind, let’s start with the following example, we’ll call it exhibit A. In this case, Input Capital will provide a farmer with an upfront $1 million payment. Input will then receive a “stream” of 770 tons of canola at a fixed price of $100 per ton annually for 6 years. But what’s that worth you ask? Well, if assume a reasonable mid cycle canola price of about $500 per ton (note canola was trading north of $600 earlier this year), quite a bit actually, as Input would stand to generate annual cash flows of ~$308,000 a year, which of course equates to a yield of about a 30% on invested capital every year over the life of the six year contract. Of course the fact that the unit economics of a streamer are as good as they are is certainly no surprise to this crowd but then again, it wouldn’t be right if we didn’t lay out a simple walk like this to hammer home the point.
But it gets better! First you need to keep in mind that these steaming contracts entitle Input to receive additional “bonus” tons that offer extra upside if productivity is particularly good in any given year (typically this amounts to 15% of the crop yield over 30 bushels/acre). Yet these bonus tons are more of a side show in my mind given what really starts to make the numbers get crazy is when you start to factor in Input’s ability to reinvest each year’s cash flows into even more high-yield streams!
As an aside, if you don’t know by now, Above Average Odd’s has a special place in its heart for exponential compounding machines and Input Capital may be one of the best natural compounders we’ve ever seen. Of course time will tell but assuming the model works as well as it has to date and management can execute on a level commensurate with their capabilities, we don’t think it’s a stretch to say we may be on the ground floor of what we think will be a truly magnificent five year period of exponential growth in per share.
Think that’s hyperbole? Take a look at what the company’s done in the last year. With 10 streams in place and a balance sheet that will fund an additional 20-30 streams this year, the snowball has already started rolling. And this is the type of snowball that the bigger it gets, the faster it should grow (here’s to hitting escape velocity sooner than later!).
You see Input’s “breakthrough” value proposition is very much at the heart of why we are so excited about this undiscovered franchise’s future. For the farmer, gaining access to critical working capital is just the beginning. Input also provides access to bargaining power with grain handlers and Input Capital providers like fertilizer. For example having the cash to buy fertilizer during the fall off-season saves the farmer as much as 20-40%. Having the cash to pay also means the farmer gets a 3% discount and doesn’t have to carry interest costs, which frees up more cash. And of course, the more excess cash a farmer has at his disposal the more they’ll be able to invest in profit maximizing inputs that should enable their farm to become more materially more productive than it would have been possible otherwise.
Think about it like this: instead of traditionally spending $200