Two months ago I wrote my thesis on Input Capital Corp, which essentially boils down to they are generating lots of cash but the business model seems to be misunderstood or otherwise not getting the full respect it deserves. Everyone seems to accept that mining streams are good models, and are safe ways to play precious metal prices. Far fewer seem to think that agricultural streams are a good way to play canola prices though.
Since I wrote that shares fell to $1.70 several times, but overall hasn’t moved much at all. Despite this I have been expecting a big quarter from INP, and they delivered. Investors are lucky to receive a “quarterly operations update” from Input shortly after the conclusion of each fiscal quarter, in addition to the audited financial statements provided by all public companies. The numbers are usually revised a little by the time earnings come out due to timing issues of sales or contract signings, but the numbers are good enough to judge a quarter by for the most part.
These updates won’t announce earnings per share, cash flow, or the other common metrics used for valuations. But they do state a few metrics that are important to Input: canola sold, capital deployed, total number of streaming contracts, and total canola reserves. Here’s what to take from each of those numbers in these updates.
Canola Sold – Input makes money by selling canola. Management will provide the money made from selling canola, the tonnes that were sold and the average selling price per tonne. I mostly use this number to determine a fair price to use in my estimates for canola sold. Input made $9 million selling almost 19,000 MT of canola at an average of $476/MT in the three months ended March 31.
Capital Deployed – Input purchases canola by giving farmers an upfront payment in exchange for the right to purchase tonnes at a later date for a very reduced price. So capital deployed is obviously a reflection of future revenues. Input deployed $20.2 million of capital in the quarter, which is their highest quarterly total to date. Management set a goal of deploying $50 million each fiscal year, and that is what I used in my first article to predict future cash flows. After six months this year they’ve deployed $32.2 million. Unfortunately this quarter is by far the biggest for capital deployment, so it is unlikely they get to $50 million this year.
Number of Streams – This is the number of farmers who are selling their canola to Input. Higher is better, and Input has made great efforts to diversify their sources of revenue by signing many small contracts with farmers rather than fewer big contracts. This came after a few highly publicized defaults. Input was able to recover most of their money through securing and selling land and equipment, and Input should now be a stronger, less risky company. The $20.2 million Input deployed this quarter went out to 126 farmers, meaning upfront payments averaged just $160,317. 61 of these were new contracts, bringing Input’s streams up to 181, a big jump from this time last year when they had 94.
Canola Reserves – This is the number of tonnes of canola that Input has agreed to buy from farmers in exchange for the upfront payments and small payments upon delivery. After this quarter Input now has reserves of 465,000 MT.
This update gives us a few points from which we can adjust our valuation of the company.
With reserves of 465,000 MT, Input’s “assets” have substantially increased. Upfront payments have already been made for these tonnes, so the majority of the expense going forward is the crop payment. If we assume Input can sell these reserves for an average of $470/MT, this canola will provide revenue of $218,550,000.
Management predicted crop payments to average $86/MT as of September 30, 2016. This could increase though as contracts are structured differently to provide less cash upfront and more on delivery. If crop payments instead average $170/MT, buying these reserves will cost $79,050,000 in the future.
Combine these, and factor in a diluted share count of 89,150,609, and I calculate the future canola to be worth $1.56 per share. This money would need to be discounted to some extent to give a present value, but I maintain much of the current share price is backed by canola already “owned” by Input.
As of December 31, Input had $28,164,253 in cash. We know they made $9 million from selling canola, and they paid out $20.2 million for new streams. If we assume $86/MT for crop payments (management estimates should be accurate this close to the prediction), it’s another $1.623 million out.
Input also announced they closed the sale of 4320 acres of land. $1000/acre should be a conservative estimate, so this should add $4.32 million to cash.
Add in business cash expenses of $3 million and Input should report having $16,661,253 in net cash (no debt) at the end of the quarter – almost 19 cents per share. After the 1 cent dividend let’s say that leaves us 17 cents.
Future canola worth roughly $1.56 and cash at 0.17 makes “book value” $1.73 per share. Buying at $2.00 means you’re buying all that canola and cash and then only paying $0.27 for the business and management team going forward.
Shares ran up about 5% since the update, but I bought around this price and I think it’s still very undervalued here. Having no peers and not having the latest cash flow numbers makes me uncomfortable trying to pin down a potential return from INP over the next year like I could with Integrated Asset Management, but I can show you management’s estimates again.
In a presentation in January, Input predicted selling 65,000 MT of canola in fiscal 2017, leading to 24 cents in cash flow.
So far this year they have sold ~44,000 MT of canola for approximately their predicted sale price. In 2016 Input sold 16,166 MT from April 1 to September 30. Repeating that will leave Input at ~60,000 for the year. At .37 cents of cash flow (based on the above estimate) per 1000 MTs sold, Input should end the year with 22 cents of operating cash flow. This should be conservative, since last year was a down year with the loss of the defaulted or bought down streams, which are now mostly replaced.
At the current $2.00, shares are trading at 9x 2017’s predicted cash flow. Ending 2017 at 10x cash flow should be reasonable, so $2.20, and buying now you’ll collect 2 cents in dividends, giving new investors an 11% return by September 30th. In subsequent years any quarterly updates like this will only add to my excitement holding this stock, and add to the potential returns.
Disclosure – Long INP.