So, we have been informed this week that Quindell (LSE: QPP) plans to press ahead with a listing on the main market of the London Stock Exchange. Does this change anything with regard to the investment case of the British insurance claims processor ?
What is next is anybody’s guess, but value investors will need more reassurance from management, or a lower share price, or both, to be able to commit to Quindell.
The Bears
“The company has been targeting a move from AIM to a premium listing; the company and its advisors continue to work on achieving this target as soon as practicable,” Quindell said yesterday.
Today, Quindell stock was down almost 7% to 17.3p at one point. It’s bounced back a bit since, and is currently at almost 17.9p, but that’s still close to a 5% fall on the day so far.
About a week ago, when it traded at 21p, I wrote that one way to assess the value of Quindell was to gauge its current and long-term assets. Based on that approach, I calculated that Quindell would be worth between 12p and 13.8p, depending on certain assumptions.
Value investors won’t be enticed by the prospects of a company that seems eager to deploy marketing tools more than operational changes, the bears would argue. Quindell has been banging on about a “premium listing” for some time now, they’d conclude. And opportunistic shorters may even be eager to bet on a further fall in Quindell’s share price.
The Bulls
A listing on the main stock exchange in the UK is no guarantee of success, of course. But what a listing on the LSE does bring is easier access to capital, something that Quindell needs to fund its ambitious expansion plans (read: acquisitions).
The bulls would rightly point out that greater funding options would make a difference in assessing the risk of a Quindell investment, although Quindell states that its latest round of funding would suffice to meet budget requirements.
Quindell’s track record is limited to 2012 and 2013. Return on equity (17.3%) and return on assets (11.2%) have risen by almost one percentage point in the last 12 months. Looking ahead, what sort of estimates are there for the profit and loss statement?
According to Capital IQ S&P consensus estimates, revenue will hit £1bn and £1.6bn in 2014 and 2015, respectively, while adjusted operating profit before depreciation, amortisation, interest and taxes will surge to half a billion pounds, yielding an impressive earnings per shares growth of more than 100% annually. Admittedly, such an astonishing EPS rise is from a very low base — but it should be priced into the stock, the bulls insist.
And even if Quindell doesn’t grow as fast as some brokers suggest, it remains an asset-light business that can cope with negative cash flow for some time. It is of paramount importance that it can raise funds when it needs to, hence the need for a listing on the LSE. A debt-free balance sheet and the £200m fundraising that took place at the end of 2013 offer reassurance.
As far as their reputation is concerned, Quindell management will likely devote more time on corporate governance — tougher rules apply to a main market listing — as well as to convincing investors that their business plan is flawless. Their response to the public attack they received from Gotham City Research earlier this year was comprehensive and detailed, the bulls may conclude.
