1q2018 notes:
1. Inp.v is an agriculture related business. When things go well, Canola is received and turned to cash close to harvest until winter. On these quarters expect to see most revenues, at least from Working Capital Streams.
2. We have learned that high Canola prices acts as headwinds to working capital, marketing streams. Farmers feel rich with cash. It’s not unexpected. With everything AG, the saying goes, high prices remedy high prices. As everyone rushes in to capitalize on them, they drop back.
3.The most important news, I believe, is Input Capital’s mortgage streams. There’s a comprehensive informative deck in the IR part of the site. It would seem the mortgage product might address a larger market and provide good reinvestment opportunities.
4. At the end, Input Capital fate as a good investment rests on its ability to rapidly deploy cash into profitable streams, and then rapidly deploy the profits into new streams, over low fixed costs, thereby unleashing the magic of compound interest.
The key statistics to watch, that will tell us if this IS happening are:
1. Annual Deployment figures: do they Increase?
2. MT Canola reserves: do they grow at a proper speed?
Risk.
I believe Input Capital has done a good going through a learning curve with respect to Risk management. Today’s Canola book is a diversified book and comprises a smaller part of each farmers’ harvest. In addition, today we know we can trust the underwriting process and security management. In addition, today’s business has evolved to a point there is little to no real balance sheet risk for investors.
Past?
The key disappointment with INP.V has been an inability to deploy Cash, at a rapid pace. Working Capital streams are far from free money. Successful farmers lived without them. Struggling farmers are not the proper public for this solution. I have come to the conclusion the TAM is smaller than previously estimated for working capital streams.
Management knows this and has shown remarkable ability to evolve and translate the skills of the team into additional products such as marketing stream and the new mortgage streams.
Future?
What does the future hold for Input Capital? I wish I knew.
I believe, though, that the worst case is a muddle through with deployment slightly over replacement rate (remember, to stay still, they need to replace harvested Canola MT). In this case, the company could return surplus cash via buybacks or Dividend (which is already paid).
If management does not go rouge and try to enrich themselves via free stock, we will be looking at a bond like return with inflation hedging. AG commodities provide good hedge. If Inflation goes out of proportion one day, Input would do well with its light Capital structure and Canola prices.
Today’s prices seem to suggest that is what the market expects going forward.
The better case is mortgage streams pick up and farmers warm to the idea of paying with Canola for the interest. Land prices have gone up. The demographics say there will be a change of land ownership as farmers retire and want to cash out. The Mortgage market is several times that of Working Capital. Mortgages is something farmers are conditioned to use. The familiarity factor is high.
If Input Capital can tap this market and match the working capital IRR, It would not be unreasonable to expect an execution of the original thesis.
I regard the high ownership stake in the business as a huge plus and would probably not wait if management was not putting their money where their mouth is.
There has seem to be a constant selling pressure in the past months as deployment failed to materialize.
For the time being I’m holding and watching.
With a little luck, it will be worth while.
Time will tell.
DeepDive
