INP.CVE - Input Capital

[AAOI]

We did hire Fundamental to write an independent report on us back then because we didn’t expect to have any other coverage.

(emphasis mine)

 

I suppose we strongly disagree on a lot of things.  In any case, I wish you the best of luck.  I have no position in this.

 

Ha! Boom! Clearly you've found the smoking gun!! Check mate. (sarcasm mine)

 

I have a big position in this.

[ItsAValueTrap]

Ryan, I think you and I have very different interpretations of the hard facts, figuring out when management is BSing you, and the value of meeting with management.

[AAOI]

Ryan, I think you and I have very different interpretations of the hard facts, figuring out when management is BSing you, and the value of meeting with management.

 

Yes, that's becoming clear to me now.

 

To be clear, I totally empathize with the concerns as experience has taught me that these things can point to larger issues that can be easy to miss. Which is of course why it's always good to take a step back and carefully think through whether managements actions/comments downplaying the issue really hold up to careful scrutiny. As a commenter on my blog once put it, "all CEO's are lying whores" (lol).

 

Regardless, while I'm not quite that sceptical as the commentator there is a lot of truth to his (and apparently your) point of view, incentives being what they are and all. At the same time, remaining skeptical in the face of overwhelming evidence that your initial concerns are off base is just as idiotic as the gullible analyst who gobbles up every word management speaks as gospel. Personally, I try to carefully weigh the evidence and derive a reasoned conclusion based on where the evidence shakes out. Anyhow, to paraphrase Keynes, when the facts as I understand them change, I change my mind. And the facts concerning this team speak for themselves. I mean it's ok to admit that you may have misjudged these guys - your concerns we're good ones - they just don't add up.

 

In any case, speaking of evidence and more importantly, incentives with respect to Input's management and the whole stock promote/pump and dump charge, I thought the CFO's response pretty much says it all. In fact, if there is such a thing as a "check mate" in this regard this is it.

 

"You’re right - it’d be pretty hard to actually look at the insider trading records for Input and think we are a bunch of pump & dumpers.  The collective current value of the shareholdings of the three co-founders is just over $28 million.  Plus another $5 million or so in vested, in-the-money options.  The last of our shares and options came out of escrow in January of this year, and if we were pump & dumpers, we’d be bound to have sold something by now.

 

Instead, we’ve all bought additional shares in every financing since we started the company – that means at $1.00, at $1.60 and at $2.30, plus we have a significant number of our family members who have bought shares with their own money, including my own mother.  Plus I believe that every employee has been a buyer of shares over the last year or so.  And the only options that have been exercised have been exercised with cash and without selling the resulting shares."

 

Of course maybe I'm just a gullible fool getting bullshitted by some clever con artists ;). I'm sure members of this board can come to their own conclusion.

 

Best of luck!

 

AAOI

 

[ItsAValueTrap]

Hey does anybody have a copy of one of their streaming contracts?

 

Maybe this is a good short and I haven't picked up on it.  So how are these contracts actually structured?

 

- What is the counterparty risk?  What is the collateral for the contract?

 

- So if something terrible happens to canola crop in the area, what happens?  Is the former forced to buy up some canola (possibly at a very high price due to a local canola shortage) to meet the requirements of the streaming contract?

 

- Is the farmer incentivized to allow soil depletion to happen and let yields fall?

 

[AAOI]

Hey does anybody have a copy of one of their streaming contracts?

 

Maybe this is a good short and I haven't picked up on it.  So how are these contracts actually structured?

 

- What is the counterparty risk?  What is the collateral for the contract?

 

- So if something terrible happens to canola crop in the area, what happens?  Is the former forced to buy up some canola (possibly at a very high price due to a local canola shortage) to meet the requirements of the streaming contract?

 

- Is the farmer incentivized to allow soil depletion to happen and let yields fall?

 

Omg, just read part one and two of my write-ups on the details so you don't get your face ripped off like you have with Avid.

 

This will be more fun then when you were posting about shorting it at 6 while I was buying the shit out of it (Fyi, it's now at $15 and set to go higher). Short away!!

[ItsAValueTrap]

Hey does anybody have a copy of one of their streaming contracts?

 

Maybe this is a good short and I haven't picked up on it.  So how are these contracts actually structured?

 

- What is the counterparty risk?  What is the collateral for the contract?

 

- So if something terrible happens to canola crop in the area, what happens?  Is the former forced to buy up some canola (possibly at a very high price due to a local canola shortage) to meet the requirements of the streaming contract?

 

- Is the farmer incentivized to allow soil depletion to happen and let yields fall?

 

http://www.agriville.com/cgi-bin/forums/viewThread.cgi?1410366955

So the contract is securitized with land.  A lot of the farmers on agriville.com seem to think that they are loan sharks, though I'm guessing that none of the posters have looked at an actual contract.

 

The SEDAR farmings describe some of the things about their contracts (e.g. Input can't own farmland for more than 2 years, it has to sell farmland that it acquires from defaulted contracts).

 

In any case, I don't think that Input will lose money that quickly.  Plus, they sit on a pile of cash.  I'm probably better off spending time on finding some company that spends $1M/year on "investor relations".

[Otsog]

Ya, at the very least I'd wait until the cash hoard is deployed.  They do keep a nice looking balance sheet.

[f62]

Hi there,

 

I wanted to remark on the issue of non-IFRS metrics. I actually find them very useful for valuing the business (much more so than their IFRS figures, which make no intuitive sense to me), but I am not an expert on streaming models, so I would very much appreciate if anyone could please point out flaws in my reasoning below (also see attached xls):

 

a: Projected tonnes per year	42,000
b: Cash operating margin per tonne	380
c: Cost per tonne acquired	230
d: Gross Margin	15,960,000	(=a*b)
e: OpEx	3,000,000	(approx. LTM figure)
f: EBITDA	12,960,000	(=d-e)
g: 'Maintenance Capex'	1,610,000	(= 1/6 * a * c ; to maintain constant stream of 42k tonnes p.a, 7k tonnes have to be acquired p.a.)
h: FCF	11,350,000	(=f-g)

 

Now apply a 10x multiple to the FCF, and you get an EV of 113,5m, plus 56m in cash for a market cap of approx. 170m. This would be a reasonable valuation for a steady state, i.e. assigning zero value to growth from now on.

 

Lets assume they manage to contract 240 farmers by 2020 (their plan is 200-300 in 5 years). You can do the same calculation as above and get a FCF between 70m and 80m for a steady state valuation north of 700m. Discount that @ 15% for 5 years and the present value would be approx. 350m+ (without cash).

 

This of course assumes that the "cash operating margin per tonne" and "cost per tonne acquired" remain at current levels. For all I know the company does not hedge the canola price, so a permanent decline in canola price is a risk.

 

It will be very interesting to see how many new farmers they could contract in Q4 (ending March 2015), should give a sense of the tragectory towards 200-300 farmers.

 

Any comments highly welcome. Thanks.

Input_Capital_Quarterly_Figures.xlsx

[Otsog]

From latest MD&A

 

Cost per Tonne Acquired is based on the tonnes the Company expects

to receive over the term of a streaming contract. For example, if the Company enters into a six year streaming

contract for 1,000 MT per year, the Company expects to receive 6,000 MT over the term of the streaming contract.

 

I think the maintenance capex s/b a*c = 9,660,000

 

FCF = 3,300,000

*10 = 33,000,000

plus cash = 89,000,000

[f62]

Otsog, thanks for the quick reply.

 

Let me explain how I came up with the maintenance capex figure:

 

Currently there are 42 farmers contracted, which translates to ~42,000 tonnes per year from those 42 farmers. If that were the steady state of the company, they would have a "churn" of 7 farmers per year on average, since the "lifetime" of 1 farmer is 6 years. So they would have to contract 7 farmers per year (which translates to 7,000 tonnes per year on average) to maintain the stream of 42,000 tonnes p.a.

 

Does that make sense? Or, what am I missing that you include in your mc figure?

[Otsog]

Their cost per ton includes every ton for the entire life of the contract.

 

Say they only have 1 contract for all 42,000 tons for 6 years that they paid their average cost of 230/ton for

 

42,000 tons of production per year means the contract has a total production of 252,000 tons

 

Contract cost = 252,000 * 230 = 57,960,000

 

57,960,000 cost will deplete at $9,660,000 per year over the life of the contract

252,000 tons will deplete at 42,000 tons per year over the life of the contract

 

 

 

[f62]

Otsag thanks again, now I get it, you are absolutely right of course.

 

So the steady state calculation with 240 farmers would look like this:

 

a: Projected tonnes per year	240,000
b: Cash operating margin per tonne	380
c: Cost per tonne acquired	230
d: Gross Margin	91,200,000	(=a*b)
e: OpEx	6,000,000	(approx. twice(?) LTM figure)
f: EBITDA	85,200,000	(=d-e)
g: 'Maintenance Capex'	55,200,000	(=a*c)
h: FCF	30,000,000	(=f-g)

 

At 10x FCF this amounts to an EV of 300m. Current EV is approx. 200m (260m market cap minus 60m cash). If I use a 15% discount rate, the current valuation implies that the company will get to 240 farmers in 3 years (200 * 1.15^3 = 300).

 

Do you agree with that view?

 

Thx.

[bargainhunter]

Input just released their Q4 update -- they deployed another $20 million. I must say I agree with AAOI on this one.

 

http://investor.inputcapital.com/news/Press-Release-Details/2015/Input-Capital-Corp-Announces-Record-Capital-Deployment-in-Q4-Operations-Update/default.aspx

 

[bargainhunter]

Down over 40% today after saying the company is "terminating" three of its contracts. Seems a gross overreaction assuming they can fully recover the investment through the enforcement of security.

 

Nonetheless the lack of detail in the statement -- and the fact this didn't come out at their earnings call a week ago -- is disconcerting. Anyone else following this name?

 

More broadly speaking, the market seems extremely jittery right now. We are seeing massive outsized moves in response to even mild earnings disappointments, etc.

[tripleoptician]

I just increased my position by 50% on this. Having read the annual reports, I think the security claims they put in place seem rigorous including having potential claim to the farm itself.

The $80 million market cap decline today is out of proportion in my opinion. Total contracts (current and future) is around $92 million and the 3 contracts is ~$18 million and input says the security claim is around $24 million.

The market is pricing this as a fundamental impedance to their business model, but I don't think it is. In fact, if they achieve even a 50% return on the security claim I would make the case it strengthens the business model to show it has withstood one of the risks here. Seems like a good bet to make at this time as management have been at this game a while before in the Assinaboia private group and hopefully have the experience to deal with this.

 

Would be interesting to get AAOI's take as he has done a lot of work here before.

[bargainhunter]

I just increased my position by 50% on this. Having read the annual reports, I think the security claims they put in place seem rigorous including having potential claim to the farm itself.

The $80 million market cap decline today is out of proportion in my opinion. Total contracts (current and future) is around $92 million and the 3 contracts is ~$18 million and input says the security claim is around $24 million.

The market is pricing this as a fundamental impedance to their business model, but I don't think it is. In fact, if they achieve even a 50% return on the security claim I would make the case it strengthens the business model to show it has withstood one of the risks here. Seems like a good bet to make at this time as management have been at this game a while before in the Assinaboia private group and hopefully have the experience to deal with this.

 

Would be interesting to get AAOI's take as he has done a lot of work here before.

 

I'd be adding too if I had the funds. Have been hit by a perfect storm of events like this in my portfolio in the past few weeks. Note to self: Always keep some cash at hand!

[GrizzlyRock]

Buying opportunity of the year.  Wish I could say more publicaly

[ItsAValueTrap]

Omg, just read part one and two of my write-ups on the details so you don't get your face ripped off like you have with Avid.

 

This will be more fun then when you were posting about shorting it at 6 while I was buying the shit out of it (Fyi, it's now at $15 and set to go higher). Short away!!

 

So... both Avid and Input Capital are down significantly since your post in March.

[Patmo]

Very interesting business model, can someone walk me through how cheap it is currently though, ELI5 style? I'm a simpleton. Thanks for sharing the idea by the way.

 

 

What I see right now is the 9mil net earnings/operating cash flows in the last 6 months, giving a 8x diluted multiple at run rate, which I guess is pretty cheap given the business' economics. If things work out as pumped by AAOI,  earnings could realistically grow to $100million and above within 5 years, and given the economics of the business it could easily trade at 20x earnings.

 

I might throw some pocket change at this and see where it goes...

[GrizzlyRock]

If starting fresh, I would do the following:

- Go back t the IPO presentations and model out each of the first 10 streams so you understand contract mechanics

- Spend time with the materials and CFO to understand downside protection on a stream by stream basis. 

- Also work to understand why Input's flexible financing is so powerful for a farmer

- Assess mgmt quality

- THEN try to model the biz holistically going forward

 

Hope this helps

[Swami X]

I recently queried the Input Capital Investor Relations about the collateral underlying the three cancelled contracts and the reasons for cancellation. Here is the response I received:

 

Collateral against the loans:

 

Input has three layers of security. The first, and highest priority, is mortgage security on farmland. The second is a General Security Agreement (or GSA) that gives us security over other assets on the farm such tractors, bins, tools, other buildings, etc. The third is a Purchase Money Security Interest (or PMSI), which is a security in the crop itself as Input provides funds to plant the crop. There is a fairly standard process around the foreclosure process.  On farmland, it takes about 18 months.  The crop and rolling stock are faster than that.  Liquidation will be no problem at all.  The land market is vibrant, and equipment sells at auction in competitive bidding every month of the year.  Farmers see farmland as one of their more liquid assets, and management spent 10 years in the farmland investment business – we know what to do with farmland if it comes into our possession. Our streaming contract and associated security documents are not available as they contain sensitive information about our producers’ farming operations and personal information.

 

Reasons the three contracts were cancelled:

 

The biggest one failed after multiple years of deteriorating results.  Good steps were taken this year which improved results, but not satisfactorily.  We could have put more capital in, but it would have been unsecured, and we weren’t willing to take that risk.  The farmer is in arrears on tonnes, and we are in a strong security position now.  So we determined that this would be the best approach.

 

The other two failed for failure to deliver, generally by choice.  We do not understand why.  There are likely some integrity issues here, and there were episodes last week that convinced us we could go no further.

 

We are highly confident in the rest of our portfolio.  With the elimination of these three bad ones, we will have a strong portfolio of 76 streams, all of whom communicate with us regularly, do what they said they would do, and have been living up to their obligations under the contracts.  Plus, none of them will be so large as to be terribly material to the overall business.

 

[Haasje]

Maybe one of you is kind enough to help me get started how to think about this?:

 

1) Is there a tax advantage with this streaming model as compared to the farmer borrowing from the bank?

2) Are Canadian bank regulations having an effect on bank lending to farmers or are they otherwise hesistant? If banks are careful with financing right now, what is the cause of that?

[Guest wellmont]

to me this sounded very gimmicky when I first heard the idea. like the perfect business model had just been invented. I remember it being heavily promoted on investment blogs.

[beerbaron]

to me this sounded very gimmicky when I first heard the idea. like the perfect business model had just been invented. I remember it being heavily promoted on investment blogs.

 

Agreed, universities and coops are full of experts that already help farmer's grow. Not sure why the farmer's would engage in such a scheme. Sounds fishy...

 

Beerbaron

[sculpin]

Here is Cormark's take on Input. Many better ideas out there with less uncertainty....

 

Lowering Target To $1.50: On November 12, 2015, Input Capital announced that it was terminating

three contracts in Saskatchewan representing $18.4 MM of deployed capital and 15K MT of expected

F2016 deliveries. With that news, we downgraded the stock to Reduce and lowered our target to $2.30.

This morning, as we survey the business prospects, economics and valuation, we are taking our target

down to $1.50, and reiterating a Reduce recommendation.

 

Is This A Viable Business? Capital deployment has been the key arbiter of value since inception, as it

represents the best proxy for demand for Input’s product offering and helps to answer the question – is

this a viable business? Notwithstanding strong deployment figures, as we examine recent events (detailed

below), it is clear to us that this question remains very much unanswered.

 

• In April 2015, 9,400 MT of the expected ~35,000 MT from the 2014 crop (~30% of expected

deliveries) were delayed indefinitely due to farming issues. This information was not disclosed until

April 2015, though the crop was harvested in the fall of 2014.

 

• In July 2015, two contracts for an aggregate 11 K MT were bought back by farmers. This information

was only disclosed formally with financial results in August 2015.

 

• In November 2015, three contracts representing 19% of capital deployed ($18.4 MM) and 19% of

2016 deliveries (15 K MT) were terminated, with the farmers in question either unable or unwilling to

deliver. Though contracts were advertised as ~$1 MM in average size and ~6 years in average

duration, somehow $18.4 M was tied up in three contracts which appear to be largely one year in

duration. This news comes five weeks after disclosure policies were materially altered and just seven

days after the release of Q2/F16 results.

 

Risks Have Grown Materially: As a result of these recent events, and the termination event in particular,

we believe risks to the business have escalated materially, as outlined below:

 

• $18.4 MM or $0.22 per share is now at risk of writedown. Management highlights $24.5 MM of

security against these contracts, but the realization of this value remains unprecedented and in any

event looks to involve a long, protracted legal process.

 

• Further delivery delays or terminations in F2016 are possible. To date, only 38% of expected F2016

deliveries have been received and recent events may potentially serve as a negative precedent for

further delays.

 

• Deployment of capital may be more challenging given that a large element of the value proposition to

farmers has been the flexibility that Input’s offering provides. This appeal may change now that legal

action is being taken against farmers. This is particularly important given that the company is now in

the key deployment period of CQ4.

 

• Input Capital is a financing company and its cost of capital has increased materially. We have been

sceptical of the company’s ability to raise any meaningful debt financing, and with recent events this

is highly unlikely, in our view. This leaves equity as a source of funding, and the share price has

declined materially, increasing the cost of equity capital. Assuming all 2016 deliveries are received,

we estimate that cash flow and current adjusted cash (~$24 MM) aggregate to $38 MM, which if fully

deployed this coming crop year would drive a decline in deployment Y/Y and likely only modestly

grow Y/Y deliveries given that a large portion of one-year duration deliveries will need to be replaced.

Economics Point To Low ROE And P/BV: There remains a number of unanswered questions with Input

Capital. The one thing we believe to be true, however, is that regardless of whether this is an “agriculture

streaming company” or not, this is clearly an alternative lender that happens to be repaid in canola. If we

look at INP on this basis and asses it on traditional lending metrics – ROE, BVPS, P/E – the stock still

looks overvalued.

 

EBITDA and CFPS are not relevant valuation metrics, in our view, as neither considers the duration of the

contracts nor takes into account the fact that one-year contracts need to be replaced with fresh capital.

The stock trades at 6.5x F2016 CF vs. the metal streaming companies at 18.8x, but this is largely

irrelevant. What really matters is the ROE of the business and the earnings growth potential. In 2016,

assuming 65 K MT delivered, we calculate $21 MM of EBITDA and $0.27 in cash flow, but only $0.05 in

EPS after taking into account amortization, a figure which accounts for the declining nature of the book.

This equates to just 4% ROE, which grows only basis points at best next year, as capital deployed serves

to merely replace lost tonnes. As the chart below indicates, robust P/BV multiples are typically reserved

for businesses that earn high ROEs. With EPS growing very modestly and with ROE limited, the stock still

looks expensive trading at 36x P/E and 1.3x P/BV.

 

So What Is INP Worth? BVPS is currently $1.39. Given the lack of ROE, the uncertainty in 20% of the

capital, the lack of visibility and transparency, and the general questions around the viability of the

business, we see no reason to ascribe a material premium to book. As a reference, Callidus Capital (CBLTSX,

Buy rating, $18.00 target, covered by Jeff Fenwick), a sub-prime alternative lender that went public

in April 2014, once traded at 3.0x BV, but has since had operating challenges and now trades at 1x P/BV

despite still posting a robust ~15% ROE. Looking at it differently, Input’s NAVPS is a similar $1.39,

assuming $460 canola (current spot of $470), a 10% discount rate and the full recovery of all $18.4 MM of

capital at risk. On this basis, the stock trades at 1.3x NAV. The two most relevant metal stream companies

are likely Sandstorm Gold (SSL-TSX, Buy rating, $6.00 target, covered by Richard Gray) and Osisko

Gold Royalties (OR-TSX, Market Perform rating, $16.50 target, covered by Richard Gray), which trade at

1.2x and 1.3x NAVPS, respectively. All in, we believe a 1.1x P/BV, which implies a 1.1x P/NAV, is likely a

fair multiple at this point. This implies a target of $1.50 from $2.30 (1.75x BV)

 

Reiterate Reduce Rating: Input Capital’s business model remains unproven. 33% of last year’s crop was

delayed and 20% of this year’s crop (so far) has been terminated. There is material upside should the

business regain a strong deployment and earnings trajectory, yet there also remains material further

downside should there be additional delivery delays or a need to write off all or some of the $18.4 MM of

capital at risk, especially considering that BV is largely just the aggregate value of similarly structured

contracts and absent of any hard value. We note as well that at this point deployment remains the key

driver of value but any positive update in this regard in early January may lead to the presumption of a

dilutive equity raise.