Wednesday 8 May 2013

Quindell Portfolio - Incredibly cheap or crash and burn?

Yesterday AIM company Quindell Portfolio announced annual results that you might be forgiven for thinking would set the pulses racing, especially as, at least on paper and at first glance, the fundamentals and future prospects of the company seem to look great. 
Quindell Portfolio´s 2012 revenues and pre-tax profits were 10 times higher than the previous year as the company focused on earnings enhancing acquisitions.

The group, which provides expertise in software, consultancy and technology enabled outsourcing to insurance and telecommunications sectors, reported revenue of £137.6m, a 904% increase compared to £13.7m a year earlier.

Pre-tax profit rose 915% to £41.2m from £41.2m and earnings before interest, tax, depreciation and amortisation (EBITDA) jumped 681% to £52.2m from £6.7m.

During the year, the company kept its emphasis on organic growth and profitable acquisitions in legal, health and claims.
http://www.digitallook.com/cgi-bin/dlmedia/security.cgi?csi=2564291&action=news&story_id=20879086

Prior to the announcement the share had been falling slightly, but upon the news it almost fell off a cliff, or at least a small one, from around 13p yesterday to a little under 11p today.

Quindell is one of those penny share type companies that seems to have a huge loyal following if comments on many BB's are anything to go by. However, even though its share price is in the penny share league, it does actually have a market cap of around £440 million, although that seems to fluctuate wildly with every 10% this way or that way move.

Reading on those BB's also suggested that bear raider Evil Knievil, Simon Cawkwell has also bet against it. If so, he has taken on the company itself which seems to be betting the other way. The Times reported that the company itself has £13.3 million in CFD long bets on its books, which some may think is not the way shareholders money should be used, while others might think it shows faith by the management in the company's future. For the moment at least, Quindell is probably losing big time on that bet (Note - read on a BB that this had now been closed although others question this).


So what is going on here? Results looked quite racy but the share price dives. P/E looks ok at around 8 and future of 5, no dividend but it is a growth story. It also has ambitions to go to the main market in due course.

First, there does appear to be a lot of new debtors on the books, a figure of £202 million, for some it is a huge potential problem, for others not so problematic and can be explained away.

Second, this is a company that seems to grow by acquisitions, it seems to be forever buying up targets and issuing new shares to do it. The CEO had a reputation for doing this with another company, Innovation Group.
In the 14 months since it floated, Innovation Group has made over 10 purchases. The largest was the £181.75m buy of rival Huon in May. In the three months ending June 30, the company unveiled pre-exceptional operating profit of £3.8m, up 619pc, and sales of £14.3m, up 607pc.
Pre-tax profits for the first nine months were £5.5m, compared with £1.8m last year.
Innovation's management were upbeat, however. Chairman and chief executive Rob Terry said that there was no evidence of a slowdown in demand, despite the weakening economic climate.
http://www.telegraph.co.uk/finance/2729417/Innovation-shares-fall-as-acquisitions-fail-to-impress.html

That article back in 2001 was written the day after the share price of Innovation fell 82.5p to 305p on the back of those results. Today, Innovation Group has a share price of around 26p. Now, I don't know if there have been share issues, rights issues, etc, or the history of Innovation since its former CEO left, but any long term holder looks to have lost a packet on it.

This article from the Investors Chronicle is also worth a read for the big picture.

The curious case of Quindell.

http://www.investorschronicle.co.uk/2013/01/21/comment/chronic-investor-blog/the-curious-case-of-quindell-Aj4mTqM3hNsBQRIXdTkAXL/article.html

The problem with Quindell is that it isn't straightforward to understand what is going on there. It could be incredibly cheap, and many small shareholders on forums will tell you that is so and all it takes is for the market to finally understand the business model, or it's a crash and burn case waiting to happen. Be interesting to see what happens if it ever makes it to the main market.

Cheap or a disaster waiting to happen? You pays your money and takes your chance with this one.

3 comments:

  1. It's around 30% cheaper so far today.

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  2. Update;

    Report from Killiks: "With regard to the speculation that the company has taken out a long CFD position in its own stock, management made it very clear to us that this is simply not the case. The “derivative financial instruments” referred to in the financial statements relate to an equity financing facility (EFF) the group entered into back in December 2012 (where it raised £17m via the placing of 97m shares at 17.5p). This fundraise was not structured as a straight equity raise, instead the shares placed with the counterparty to the facility are sold in the market over the course of a year, and Quindell receives 1/12th of this money each month. Whilst the number of shares Quindell issued to the counterparty is fixed (97m), the share price is of course moving all of the time, and the amount of money Quindell receives is the implied value of the 1/12th of the 97m shares (i.e. 8.1m shares) based upon the prevailing share price during the month. Accordingly, as the share price falls below the original 17.5p level, Quindell receives less money from the facility, and should the share price rise above 17.5p, Quindell will receive more money. Importantly, this facility itself creates a receivable on the balance sheet (which unwinds over 12 months as they money comes in), as the cash was not received upfront by Quindell. This explains the £13.3m of derivative financial instruments within the current assets section of the balance sheet, based on the FD’s comment to us that c. 15% of the potential 97m shares have been issued to the counterparty. The counterparty may now opt not to sell its monthly “entitlement” at current share price levels." Killiks also went on to say..... "Whilst we are of the view that Quindell’s proposition to its clients, following a seismic shift in the claims industry, is both compelling and disruptive (borne out by the strength of its client list and the speed at which it is winning new business), the combination of a complex business model (with a long cash conversion cycle) and acquisition-led growth funded by significant quantities of equity (and more exotic funding lines) throws up a number of red flags, and leaves Quindell as a stock that is at best going to find it hard to attract marginal buyers and, at worst, highly vulnerable to bear raids. Accordingly, with no immediate catalysts to a re-rating, we can view the shares as no more than a speculative buy sub 7p , despite the improbably low rating of 2.8x FY13E falling to 2.2x FY14E

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  3. Further company statement today; So far the market has responded positive to this after recent falls, up between 20-30% on the day as of writing.

    At the start of last week we announced record results and guided that we were preparing for our full listing. Since this time we've seen significant share price turbulence which is not related in any way to the performance of the underlying business. The Board is aware of continuing press speculation regarding the equity swap and an active short position in relation to the Company's ordinary shares. The active shorters have also called into question the quality of the Group's debtors in relation to its outsourcing business as other companies in this sector have had issues in this area. In light of this, the Board wishes to provide further clarification that following its recently reported results, the Group has a strong balance sheet, good debtor controls and continues to trade profitably with significant traction in the insurance sector.

    http://www.digitallook.com/news/rns/20890329-2564291/QPP-Further_Clarification_Regarding_Press_Speculation_html

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