Input Capital has a pretty simple business model. They pay farmers a certain amount of money up front, and then they get paid back in canola. A typical deal might be paying a farmer $240/MT of canola up front, and then paying them another $86 upon delivery. This means Input is buying canola for around $326/MT and selling it for much higher. They’ve realized average prices around $480, and the current canola price is ~$520. Input is essentially buying $5 bills for $3.20.
The mining industry has been using this business model – known as streaming – for years, but Input is the first agricultural streaming company. The companies best known for this are Franco Nevada and Silver Wheaton. You can look up the charts of those stocks for the viability of the model. And Input actually has some advantages: they get paid within one year of paying out their money (compared to many years later for mines), and they are able to place mortgages on the farms so they will get paid back in equipment or land should the farmer not be able to pay. This security has been tested by 3 deals falling through, but Input has been compensated almost the full amount, showing the downside to their deals is protected. At the time of this writing Input has collected ~$13 million of $18 million.
There is one risk you might notice – the price of canola. For the most part this is mitigated. Input is able to negotiate better prices than farmers due to their size, so their price is always $10-20 higher than what’s in the news. Second, canola prices drop typically when yields are high. This means that when prices are low Input will have more tonnes to sell and volume should overcome some downside risk. And vice versa – when yields are low and Input might not receive as many tonnes, the price will be high and they can make lots of money on less canola.
The balance sheet is a fortress with no debt and around $20 million in cash. They have “dry powder” of around $100 million (cash, cash flow, and an unused credit facility) in this fiscal year to make new deals, with a goal of deploying $50 million. In just over 3 years they’ve grown from 10 “streams” to 122 as of this January. Input also just initiated a dividend, so it pays out a 2% yield, in case you need to be paid to wait for the growth. They trade around 6x free cash flow, which is 20% of what the large mining streamers even though their business model might be even better. I believe this discount comes from a misunderstanding of the model, and simply because they are opening a new market so people are hesitant to see if it works. Canola they “own” at this moment is worth $1.44/share, plus cash of ~$.25/share, makes book value about $1.69, and INP is trading at $1.85. Very cheap considering the growth runway they have.
Management includes a former deputy minister of agricultural, a Canadian Agricultural Hall of Famer (it’s a thing, I checked, and I’m pretty sure just checking it’s a thing made me a member too), a director for both Alaris Royalty and Sandstorm Gold (a successful mining streamer). The CEO and CFO founded a farmland fund which had compounded returns of 19% before being bought by the Canadian Pension Plan Investment Board. Management has proven to be very successful, and own over 22% of shares, so their interests are aligned with the shareholders.
Input is a successful company with no immediate competitors, a proven business model, downside protection, a large pool of farmers to grow with, competent management, is trading cheap when looking at book value, cash flow, and mining streamers. Shares have traded over $3 recently, and the company has become stronger and proved its business and security model since so there is no reason INP can’t be $3 by the end of 2017 if management can deploy as much capital as they plan to.
Consider INP if you’re interested in a company which can grow its share price greatly, while also paying a sustainable yield with lots of room to grow. This company is just at the start of its story.
Disclosure: Long INP
All images from Input Capital’s most recent investor presentation.