INP.CVE - Input Capital

[Guest Schwab711]

In the GrizzleyRock presentation:

*Why would the hypothetical farmer's revenue increase by 15% with a stream contract?

 

Without this increase in revenue, the hypothetical farmer is appears to be worse off with Input's financing, even with the assumption of 20% savings on fertilizer and 15% on seeds.

 

It has to do with the farmer's timing of sale for their leftover canola tonnes after giving Input their share. Traditional farmers that aren't flush with capital all have to sell their canola at the same time to finance portions of their ongoing capital expenditures. Peak supply is September/October right after harvest and the farmer will need to sell at a lower price during this time secondary to typical supply/demand curves. If they can wait to sell into Dec/Jan and onwards then they can achieve superior prices for their canola.

 

But they are selling their canola for $300 as opposed to $475 spot price (to continue with the example). How could revenue possibly be higher? Would you mind spelling it out for me?

 

The savings on fertilizer and seed are not hypothetical and are borne out in objective data. It is the same supply/demand issues at play and off-season purchases go a long way.

 

I agree with the theory, I know this has historically been true. With greater price transparency online, why can't farmers get loans/LOCs to do the same thing? Seems like savings >> interest would make this low-hanging fruit...

 

An additional variable that appears to have the potential for some customer stickiness to Input is their superior grain marketing results. They have consistently achieved better than average yearly canola pricing in the 7-15% range. This is not a hedging program, but an in-year locking-in of prices at opportune times. They have an employee that worked at the Winnipeg Commodities future Market who has this as his primary task. This superior pricing will only grow with time as Input have effectively become the biggest mover of canola in the Canadian market. Keep in mind that canola farming in Canada is essentially all private farmers with no institutional involvement. So by selling far more then anyone else, Input is getting superior pricing discounts and this will grow with time. In conference calls, they have alluded to allowing the farmer partners to also market their canola portions along side the company, thereby achieving far better canola market strategies and pricing then the farmers could ever do by themselves.

 

Canola oil looks to have low speculator volume so I could see the trader having some benefits considering they represent true volume. Input has relatively low share of the market compared to some of the largest farmers. Either way, it appears to be a fragmented supply. I think Input will have relative sticky customers if the deal actually makes sense for both sides of the deal. I'm not convinced that is the case at the moment and it I think it is the make-or-break question for Input as an investment.

 

This business is not meant for the experienced, cash rich farmer who would hate to give up the High IRR's for capital that doesn't significantly change their business profitability. Yet for expanding or newer farmers, this business can equate to a win-win for lender/borrower which puts the growth potential and risk profile in a different category then alternative lenders.

 

Do their customers need them less with each passing year? If Input does everything they say, most farmers do not need them (since farmers <45 years old are uncommon) and the ones that do will need them less each year (they gain experience and profit [hopefully] each year). There is relatively low farmer turnover each year and I'm guessing the area is consolidating like most Northern US farms. It seems possible to me that demand for Input's services may be at an all-time high, which would be a tough headwind.

[tripleoptician]

In the GrizzleyRock presentation:

*Why would the hypothetical farmer's revenue increase by 15% with a stream contract?

 

Without this increase in revenue, the hypothetical farmer is appears to be worse off with Input's financing, even with the assumption of 20% savings on fertilizer and 15% on seeds.

 

It has to do with the farmer's timing of sale for their leftover canola tonnes after giving Input their share. Traditional farmers that aren't flush with capital all have to sell their canola at the same time to finance portions of their ongoing capital expenditures. Peak supply is September/October right after harvest and the farmer will need to sell at a lower price during this time secondary to typical supply/demand curves. If they can wait to sell into Dec/Jan and onwards then they can achieve superior prices for their canola.

 

But they are selling their canola for $300 as opposed to $475 spot price (to continue with the example). How could revenue possibly be higher? Would you mind spelling it out for me?

 

This is pretty key to understanding both the risk to Input and the farmer on these contracts. Refer to AAOI's detailed write-ups for more details. To quickly summarize, Input is only getting about 1/3 of the total canola crop for an individual farmer, therefore the farmer still has 2/3rds of their acutal canola to sell. In addition, canola is usually only a 1/3 rotation, which means there are 2 other crops taking up the other 2/3 of the total farmer's acreage (wheat, durham, barley, corn, lentil etc). The cheaper inputs by buying off-season can help influence improved yields on the other crops beyond canola as well, which is gravy for the farmer as Input doesn't get any of this crop. So really Input is only taking 1/9 of the total portion of a farmer's acreage production.

 

The terminated contracts are interesting for why they actually occurred. Before getting to foreclosure, there are 2 other protections before the main security package:

1) Crop Insurance - should cover 70% of previous average yields and this is mandatory for the farmer to buy to enter a contract with Input (its at the farmer's expense)

2)PMSI which is a lien to the other crop

 

These contracts was original contracts that were larger in size and paid out more than 1/3rd of total canola production. This led to some breakdowns in the initial security features before foreclosure, and is why the company are now doing smaller sized deals and sticking to the 1/3rd maximum.

 

The savings on fertilizer and seed are not hypothetical and are borne out in objective data. It is the same supply/demand issues at play and off-season purchases go a long way.

 

I agree with the theory, I know this has historically been true. With greater price transparency online, why can't farmers get loans/LOCs to do the same thing? Seems like savings >> interest would make this low-hanging fruit...

 

There are a ton of alternate financing options, and this was my first question when I saw what high IRR's were when you analyze the initial deals. It seems like a no-brainer a farmer could find cheaper capital. See the link below. After this and other research, I found out that many farmers have many sources of capital and the ones involving themselves with Input almost certainly have other loans as well. It's a $92 billion total loan industry and Input's total ~$100 million financing capital represents a miniscule fraction of total agriculture financing.

 

The LOC's and trade credit aren't very flexible and can cause sub-optimal capital allocation decisions. That's why Input tries there best to be seen as "flexible" capital that is willing to work with farmers on dealing with short-falls are giving additional capital when warranted. Again, it's a distinct niche of farmer that both needs and benefits from Input's capital, but they aren't competing with traditional lending products here.

 

http://www5.statcan.gc.ca/cansim/pick-choisir?lang=eng&p2=33&id=0020008

 

An additional variable that appears to have the potential for some customer stickiness to Input is their superior grain marketing results. They have consistently achieved better than average yearly canola pricing in the 7-15% range. This is not a hedging program, but an in-year locking-in of prices at opportune times. They have an employee that worked at the Winnipeg Commodities future Market who has this as his primary task. This superior pricing will only grow with time as Input have effectively become the biggest mover of canola in the Canadian market. Keep in mind that canola farming in Canada is essentially all private farmers with no institutional involvement. So by selling far more then anyone else, Input is getting superior pricing discounts and this will grow with time. In conference calls, they have alluded to allowing the farmer partners to also market their canola portions along side the company, thereby achieving far better canola market strategies and pricing then the farmers could ever do by themselves.

 

Canola oil looks to have low speculator volume so I could see the trader having some benefits considering they represent true volume. Input has relatively low share of the market compared to some of the largest farmers. Either way, it appears to be a fragmented supply. I think Input will have relative sticky customers if the deal actually makes sense for both sides of the deal. I'm not convinced that is the case at the moment and it I think it is the make-or-break question for Input as an investment.

 

This business is not meant for the experienced, cash rich farmer who would hate to give up the High IRR's for capital that doesn't significantly change their business profitability. Yet for expanding or newer farmers, this business can equate to a win-win for lender/borrower which puts the growth potential and risk profile in a different category then alternative lenders.

 

Do their customers need them less with each passing year? If Input does everything they say, most farmers do not need them (since farmers <45 years old are uncommon) and the ones that do will need them less each year (they gain experience and profit [hopefully] each year). There is relatively low farmer turnover each year and I'm guessing the area is consolidating like most Northern US farms. It seems possible to me that demand for Input's services may be at an all-time high, which would be a tough headwind.

 

Again, AAOI's detailed write up went into a number of differences with how agriculture in the US has gone vs Canada. There is no significant consolidation in Canadian agriculture; it is highly fragmented. Only private ownership of agricultural land is allowed, so big business is blocked out. There are 43,000 canola farmers in Canada. The general thought would be at the end of a six year contract, the farmer may no longer need them. But if they are young and things have gone well, using capital to grow their acreage or rent more land may make sense. This is too early to tell, but given the size of potential addressable market I think it is a small risk of running out of deal flow. That is certainly a risk in a new business model with a niche lender.

[winjitsu]

First time seeing Grizzly Rock's deck. Thanks for upload.

 

Correct me if I'm wrong, but between Grizzly's deck, AAOI's posts on his blog and VIC, and the posts on this thread, no one has actually spent time boots on the ground in Alberta actually talking to farmers on why they would choose this financing. Instead, all I've seen are pages of reasons why, with input from management, they think this business model works. I think this is a glaring hole in due diligence.

 

As I've mentioned, the upside on this stock is dependent on the growth case, so it's really important to criticize it strongly rather than just assume loans continue to grow. For example, would a farmer take another loan after 6 years? Does it make sense to take two loans out at the same time? etc etc. If borrowers wouldn't use this service again, its a really bad omen for things to come, for example. I'm reminded of the Jiffy Lube short example in The Art of Short Selling where the stock's growth story was hyped up while in local classified ads, franchisees were trying to get out of the business. These are things that management won't and can't tell you.

 

I am always worried that a group of very intelligent people rationalize a million reasons for why a farmer would want to take these loans, rather than *actually* just talking to them.

 

This stock has always been a punt for pint money for the aforementioned reason and since I am very lazy.

[Otsog]

http://www.stockhouse.com/news/press-releases/2016/05/31/input-capital-corp-announces-fiscal-2016-year-end-results

 

Capital Deployed² down 28%

Canola Reserves (MT)² down 8%

Cash operating margin¹ up 187%

Adjusted Operating Cash Flow¹ up 209%

Adjusted EBITDA¹ up 371%

 

¹ Non-IFRS financial measures with no standardized meaning under IFRS. For further information and a detailed reconciliation, refer to "Non-IFRS Measures" in the accompanying MD&A.

 

² Includes contracts that were signed but not completely funded at the end of the fiscal year.

 

[AAOI]

Winjitsu/Tripleoptician - guys, appreciate the voice of reason here (much appreciated!), and apologies for not popping up sooner but it's been awhile since I've spent much time on these boards. Regardless, I think most of your commentary is spot on.

 

With that said I'm going to spend some time reviewing all the misguided and uninformed bear arguments (even the mind mumbling tired ones on accounting), and hopefully circle back with a detailed response within the next few days. Besides needing to top of my position, it will take a fair amount of time to effectively slice through the nonsense.

 

Moreover, I'll do my best to address the more reasonable questions and concerns, such as those related to growth and why I believe worries on that front are understandable yet ultimately overblown.

 

In any case, looking forward to the discussion! There is no doubt it was a disappointing year in certain respects, but for what it's worth I continue to think Input is severely mispriced.

[Guest Schwab711]

Again, AAOI's detailed write up went into a number of differences with how agriculture in the US has gone vs Canada. There is no significant consolidation in Canadian agriculture; it is highly fragmented. Only private ownership of agricultural land is allowed, so big business is blocked out.

 

http://www.theglobeandmail.com/news/national/family-farms-are-fewer-and-larger-statscan-says/article4106102/

http://www.statcan.gc.ca/ca-ra2006/articles/snapshot-portrait-eng.htm

http://www.statcan.gc.ca/pub/95-640-x/2011001/p1/p1-01-eng.htm

 

There is quite clearly a consolidation of Canadian farms throughout the country, which is especially pronounced in Saskatchewan. Larger farms have easier access to traditional bank loans so I don't we'll see a reverse of this trend anytime soon. I've lived next to small farms for most of my life and I've heard the same sentiments nearly everywhere. I imagine the board has numerous folks from the communities Input targets that could provide a better perspective.

 

The government tends to frown upon predatory lending to needy farmers. There is a very long history of government intervention (in both Canada and the US) when this occurs. Input might not be predatory but if it isn't, it's darn close to the line. For Input to record 15%-20% returns, obviously that interest must be paid by the farmers. That is astronomical given farmland margins and going rates at banks. I think Input could actually run into regulatory issues if they did manage to grow to $250m to $500m in capital invested (or at least see regulations that incentivize easier loan access). Canada seems even more protective then the US. There is also the CALA program in Canada that has focused on helping young farmers in the last 5-10 years. Input is competing with big pockets offering cheap loans.

 

I'm also not sure that Saskatchewan farmland is fully restricted from large corporations. It sounds like any private, Canadian-owned company can acquire unlimited farmland, at the moment. I think the province is leaning towards opening up investment as opposed to further restrictions, though it's hard to predict these things.

https://www.saskatchewan.ca/~/media/files/government/have%20your%20say/farmland/farmlandownership.pdf

 

For most of modern history, farming, and farmland was seen, at best, as an uncertain investment.

 

[Otsog]

This is exactly what management is going for:

 

http://i.imgur.com/jycIuT5.jpg?1

 

http://www.stockhouse.com/companies/bullboard/v.inp/input-capital-corp?postid=24923452

 

 

[AAOI]

Just laughed out loud Otsog. Gotta hand it to you, that's pretty funny. A gross mischaracterization with no relation to reality but funny nonetheless.

[Tim Eriksen]

Just laughed out loud Otsog. Gotta hand it to you, that's pretty funny. A gross mischaracterization with no relation to reality but funny nonetheless.

 

It is not like the company emphasizes this in any way.  if they were pushing this kind of thinking in any form it would be one of the top bullet points in their earnings releases.  :)

[elc13]

I spent about a week looking at this company, so I'm hoping someone on here understands the company better than I do and can point to places where my analysis goes wrong.

 

---

 

Hurdle

 

At the current market cap of $160m CAD, the market has priced Input Capital so that it will generate 20% returns if has annual cash earnings of 32m. Alternatively, since Input is growing, we can consider what the business must look like in five years to yield 20% annual returns; given its current price, it would need to reach a 400m market cap to meet this return benchmark.

 

Under what circumstances will Input be worth 400m? If Input were to generate 80m in cash earnings – or indeed anywhere near that – it would certainly be worth this much, as it would generate 20% annually for its owners.

 

How much, exactly, would Input have to grow to generate 80m in annual FCF? Conveniently, Input only really has one kind of contract, so if we understand what those contracts look like individually, we can understand what the business will look like in a steady-state scenario.

 

Unit Economics

Input’s contracts, broadly speaking, break down into two parts: upfront payment and delivery. When Input enters into a canola streaming contract, it pays the farmer a certain amount. This seems to be a part of the attractiveness of the contracts for farmers; they can put this cash to use immediately to make their operations more productive. Then, the farmer sends a certain amount of canola to input each year, Input pays some below-market price for it, and sells it on the open market.

 

The key variables are: (1) sale price/ton, (2) upfront payment/ton as % of sale price, and (3) delivery payment/ton as % of sale price. With these numbers set, the only question left is how many tons of canola Input is buying and selling each year, and you have a good idea of their pre-opex income.

 

Let’s make some rough assumptions, which we can revise later on. Suppose Input sells canola for $500/MT, and pays 44% ($220) upfront and 20% ($100) upon delivery. These numbers roughly match their reported figures in the latest quarterly report. They would have to sell 450K MT of canola each year to reach $81m in FCF. 

 

In the past 12 months, Input’s streaming volume was about 54k MT of canola. At anywhere near the ballpark assumptions I made, the company would have to grow very rapidly to generate 20% returns.

 

Predictions

 

It seems unlikely (20%) to me that Input will be able to match somewhere close to this rate of growth without triggering a significant competitive or regulatory response that compresses its margins. For that reason, I think it is unlikely (30%) that Input will clear the $400m CAD market-cap hurdle at any point over the next five years.

 

[winjitsu]

Grizzlyrock sold out and put a note on Sumzero saying that he liked the management team but the TAM simply wasn't there. After holding this for a tiny position for a while now, I tend to agree...

 

Lending $50M a year seems reasonable the data from the recent quarter, but $100M+ seems implausible, so I don't think this is a "grand slam" investment

 

Recent earnings was optimistic and the company outlines some upside if they can continue to lend out $50M/year, but I don't think they account for loan losses, as real financial firms should. There's also a real danger to having over-priced farmland as collateral. See slide 22 on http://s1.q4cdn.com/784243260/files/doc_presentations/2017/jan/updtd/170118-Corporate-Presentation-Jan-2017-After-Ops-Update-vF.pdf

 

I think 5x cash flow, $80M for a $400M market cap is way too draconian.

 

Also as I noted before,  LTM OCF or MT isn't representative of the company at steady-state since the company is still penalized for smaller early year investments. If you modeled anything, it should be a company lending at a steady 30/40/50M a year for the full 6 year duration. 

 

[Otsog]

I haven't thought about this company in years.  Had to google for a few minutes to even remember the name. 

 

It turns out the shady management team who misled investors was also shady and misleading to their clients.  Who woulda thunk?

 

http://www.cbc.ca/news/canada/saskatchewan/judge-ruling-input-capital-saskatchewan-farmer-1.4669680

 

http://www.cbc.ca/news/canada/saskatchewan/sask-farmers-accuse-regina-canola-trader-of-predatory-lending-in-class-action-lawsuit-1.4644105

 

https://www.producer.com/2018/05/judge-calls-input-capital-contracts-unconscionable/

 

https://www.canlii.org/en/sk/skpc/doc/2018/2018skpc31/2018skpc31.pdf

 

Hopefully everyone is fully divested from these parasites.

 

 

[bargainhunter]

I haven't thought about this company in years.  Had to google for a few minutes to even remember the name. 

 

It turns out the shady management team who misled investors was also shady and misleading to their clients.  Who woulda thunk?

 

http://www.cbc.ca/news/canada/saskatchewan/judge-ruling-input-capital-saskatchewan-farmer-1.4669680

 

http://www.cbc.ca/news/canada/saskatchewan/sask-farmers-accuse-regina-canola-trader-of-predatory-lending-in-class-action-lawsuit-1.4644105

 

https://www.producer.com/2018/05/judge-calls-input-capital-contracts-unconscionable/

 

https://www.canlii.org/en/sk/skpc/doc/2018/2018skpc31/2018skpc31.pdf

 

Hopefully everyone is fully divested from these parasites.

 

This is old news. Management has been pretty candid about mistakes made in the early years. They have tightened their underwriting. And I don't have the numbers in front of me but the size of the average streaming contract has significantly fallen. That of course has created worries that the TAM here is much smaller than some of us thought. Hence where the share price is today.

 

The new mortgage streaming product could change this. Management estimates a TAM 3x the size of the working capital needs that their legacy streaming product addresses. There are other benefits too. Interest payments will be accrued monthly, smoothing out their earnings (rather than just a big annual lump sum which moves around depending on the harvest). Only the interest payments will be delivered in canola (principal repayments in cash) so Input's balance sheet will over time become much less volatile. Early pace of capital deployment is promising. 

 

I've followed these guys for a long time. Only a small position currently but I would not write off this management team.

 

 

 

 

 

[Philbert77]

Well I'm down 40 percent on this one. I sure hope they can do something good from here.