Shares in Quindell (LSE: QPP) were at a high of 656p (adjusted for a recent 15-for-1 stock split) in the week before the company released its Q1 trading statement on 16 April. The market valued the AIM-listed group at around £2.7bn.
There was a lot to like in the trading update. Sales of £163m during the quarter were almost as high as last year’s entire first half. Ditto earnings per share (EPS) of 12.3p (again, adjusted for the stock split). And there was £150m in cash on the balance sheet.
Founder and chairman Rob Terry said: “The Board is pleased to announce our twelfth successive quarter meeting or exceeding market expectations in all key performance indicators”. Terry was also bullish on prospects for the full year.
Bif! Sok! Pow!
Then, on 22 April, came the publication of the now-infamous Gotham City Research report: a 74-page dossier damning Quindell’s acquisitions, profits and cash flow as “suspect” and giving the shares a target price of 3p (45p in today’s money).
Gotham City was frank in stating it stood to benefit if Quindell’s shares fell. And fall they did. Within 40 minutes as much as £1.3bn was wiped off the value of the company.
No recovery
Quindell’s immediate rejection of Gotham’s assertions failed to return the shares to their former level. Nor did a 12,500-word detailed rebuttal, and the initiation of legal action, three days later. Subsequent share-buying en masse by the board of directors hasn’t done the trick. Nor has positive news on contracts, trading and corporate governance.
A failure to be accepted for a move from AIM to London’s Main Market hasn’t helped, and today, Quindell’s shares are languishing at 207p, almost 70% below their April high.
Annualising Quindell’s Q1 EPS gives a price-to-earnings (P/E) ratio of 4.2, which falls to 3.5 based on analysts’ forecasts for the full year, and 2.5 on next year’s forecasts.
Those kind of P/Es are usually reserved for heavily indebted firms in danger of going bust, dodgy Chinese businesses, or companies the market suspects of being out-and-out frauds. Not for a company, which, as Quindell’s management claims, has “the opportunity to deliver a multi billion pound business generating significant profits”.
For one reason or another, though, Mr Market thinks Quindell stinks.
What could put a rocket under the shares?
If Quindell’s rebuttal of Gotham City’s assertions, director share-buying, positive news on contracts and trading, have all failed to re-ignite market enthusiasm, what could put a rocket under the shares?
Well, Quindell said back in March that it intended to appoint additional independent non-executive directors. At last week’s AGM, the company told shareholders a number of suitable candidates have already been identified, and further announcements will be made in due course.
Now, I think if Quindell could manage to bag a couple of seriously heavyweight independent non-execs — people prepared to stake spotless reputations on the company — we could see the shares take off on the back of the market’s approval and the squeezing of pesky shorters.
Otherwise, it will come down — as it ultimately does — to fundamentals. In the case of Quindell, cash generation is the biggest concern.
While the company last year reported an income-statement ‘paper’ operating profit of £109m, the cash flow statement showed cash generated from operations of just £3m (or £10m excluding exceptional costs).
Quindell has recently indicated that the cash flow situation is improving. If the hard numbers in the half-year results due in August show the cash flowing, the shares could start flying.
