Input Capital (TSXV: INP) â Initiating Coverage - First ... - Baystreet.ca

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Page 12 1986, the lowest crop yield was 60% of the last 5 year average. • Funds can only be used for farming related costs (fertilizer, fuel, pesticide, seeds etc.), pay down farming related debt, working capital, and to purchase equipment. • Input ensures that they have a claim on the assets of the farmer in case the farmer breaches the contract. • Input conducts extensive due diligence on each farmer. The due diligence process includes reviewing bank records, tax records, production records, payment schedules, leases, mortgages and previous crop insurance. In addition, they conduct land title searches and personal property registry. They do this to ensure that the farmer has a good history of meeting their obligations. Input also ensures the farm operators have the necessary skills and equipment to efficiently farm the land. Management also assesses the capital requirements of the farmer to see if their capital injection will benefit farming operations. • Input may also purchase and cover the cost of a life insurance policy on the farm operator equal to their initial investment. Input will be the beneficiary of the policy. • If the farmer cannot meet the owed tonnage, they can pay with another crop of equal value. Input’s management will determine the equivalent value of another crop. • Canola type and grade are specified in the contract to avoid farmers delivering poor quality product. Overall, we feel that Input has covered most of the major risks with farming and the streaming contract. We believe that the operation of the previous canola LPs helped them structure the contracts to mitigate risks. Input is still exposed to price risk, which will substantially affect the company’s performance. Input does not hedge the price of canola through derivative contracts. We feel this is a risk to investors due to the volatile nature of canola prices. However, hedging does not guarantee greater returns. Many of the public streaming companies do not hedge their long-term exposure to commodity prices. Target market Management will target farms growing canola with 3,000-15,000 acres of total acreage. The size of the farm may vary from this target. Canola usually makes up less than half of a farm’s total acreage. Input looks for farms in the dark brown, dark grey, and black soil zones of Alberta, Manitoba and Saskatchewan. These soil zones contain high organic matter, and are considered the best soil regions to grow canola. Currently, all the contracts Input has signed are located in Saskatchewan. We estimate there are approximately 5,900 farms in Western Canada that meet Input’s target market. Input will focus on farmers looking to expand their operations, but do not have adequate capital. We believe that younger farmers will continue to increase as older farmers retire, which will benefit Input in sourcing new farm operators. These younger operators will likely need cash to expand operations and maximize their yield. The 2011 agriculture census in Canada reported that 48.3% of farm operators are over the age of 55. This is a large increase from 2006, where 40.7% were over 55, and 1991 at 32.1%. We also believe that the increasing price of agricultural land (as shown in the below chart) © 2013 Fundamental Research Corp. “10 Years of Bringing Undiscovered Investment Opportunities to the Forefront “ www.researchfrc.com PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Page 13 will cause rent/mortgages to increase, and will increase the capital requirements of farmers. 20 18 16 14 12 10 8 6 4 2 0 Year over year percentage increase in farmland value Canada Alberta Saskatchewan Manitoba 2006 2007 2008 2009 2010 2011 2012 Source: Farm Credit Canada Deal Flow Management has developed strong connections / relationships with farmers through their experience managing the previous three canola LPs, and Assiniboia. Assiniboia’s farmlands have 75 canola farmers. In addition, Input has formed strategic relationships with large agriculture service companies, such as Agri-Trend and Farmers Edge, to help source additional farmers. There are no fees paid for referrals. Management estimates that as more farmers start using streaming contracts, awareness will increase because of the benefits they offer. Input had approximately $23.5 million in deployable capital in November 2012 (including capital from receivables). The first streaming contract was entered into on January 15, 2013. As of early July, management states that $19 million has been deployed in streaming contracts. Management feels streaming contracts will likely be easier to source outside the growing season of May to September, because farmers are not so focused on growing canola. Competition Competition from new streaming companies is a major risk to Input. There are few barriers to entry, and entrants may negatively affect returns. However, we feel that Input has developed relationships and industry knowledge over the last 8 years of agriculture investment, which gives them an operational advantage. Input Capital management indicated that, at the current point in time, their focus is on Canola streaming. In the future, they may expand into other crops. Canola industry We will look at the canola industry, demand for canola and key factors affecting the industry. © 2013 Fundamental Research Corp. “10 Years of Bringing Undiscovered Investment Opportunities to the Forefront “ www.researchfrc.com PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Page 1 and 2: Siddharth Rajeev, B.Tech, MBA, CFA
Page 3 and 4: Page 3 • Public company status gi
Page 5 and 6: Page 5 Gord Nystuen - Vice-Presiden
Page 7 and 8: Page 7 Source: Barchart Inflation:
Page 9 and 10: Page 9 Source: Ontario Ministry of
Page 11: Page 11 below shows the seasonality
Page 15 and 16: Page 15 Canola cash receipts (in $1
Page 17 and 18: Page 17 Source:Barcharts We believe
Page 19 and 20: Page 19 million (EPS: 0.06) in FY20
Page 21 and 22: Page 21 Input Comparable Input's FV
Page 23 and 24: Page 23 Cash Flow Statement 2012 20
Page 25: Page 25 Fundamental Research Corp.

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Input Capital (TSXV: INP) â Initiating Coverage - First ... - Baystreet.ca