It’s not been a good month for Quindell (LSE: QPP) shareholders. Despite the fast-growing company releasing a solid pre-close trading update on July 14, Quindell’s share price has collapsed, falling by 29% in 30 days.
The firm’s previously loyal shareholders seem to have been spooked, even after top institutional investor Fidelity gave the firm a vote of confidence, by increasing its stake to 10%.
In this article I’ll take a look at some of the issues facing Quindell, and explain why if the doubters are wrong, the firm’s shares could currently be a massive bargain.
Failure to launch
Quindell shares took a dive on Monday after a story in the Financial Times suggested that the firm’s flagship ‘Connected Car Solutions’ telematics deal with the RAC, which was announced in April, was not going to plan.
According to the article, no devices have yet been installed, despite the companies targeting 50,000 per month from July.
The FT also suggested that financial problems could be causing the delay, with Quindell’s dwindling cash pile threatening its ability to fund the ambitious roll-out plan, and the RAC no longer happy with its share-based payment for the deal.
Cash flow concerns
Quindell’s cash flow has become a big concern for investors, after the firm reported cash generation of just £10m on sales of £380m in 2013!
The company’s pre-close statement in July went some way to address these concerns, reporting first-half cash generation of £220m, which is 62% of the £355m revenue the firm expects to report for the last six months.
However, Quindell said it expects to report adjusted operating cash flow of -£51m for the first half of this year, which it attributes to ‘significant growth’ — suggesting to me that receivables from new contracts could be building up.
A massive bargain?
In fairness, fast-growing businesses often experience cash flow problems as they expand. Quindell still has net cash, and may well be able to extend its borrowings if necessary.
Analysts’ consensus earnings forecasts for Quindell have stayed firm, and suggest earnings of 55.2p per share in 2014 — putting Quindell on a 2014 forecast P/E of just 2.75!
If the firm’s first-half results are well received, the recovery from here could be spectacular. However, markets rarely price solid companies so cheaply: ultimately, it’s up to you to decide whether Mr Market has got it wrong with Quindell.
