Quindell (LSE: QPP) may surprise investors on Thursday when it reports interim results for the six months to 30 June — but will its shares rise more than 30%, just like they did in mid-July?
Quindell is a hard call to make. On the one hand, it’s tempting to suggest that its stock, at this price, should be included in a diversified portfolio. It is incredibly volatile, true, but it might turn out to be a once-in-a-lifetime opportunity. On the other hand, and unfortunately for Quindell shareholders, corporate governance and cash flow pose more questions than answers when it comes to assessing the investment case.
Trading Below Fair Value
The company’s current assets are worth about 124p under a base-case scenario, for a 28% discount to Quindell’s stock price of 174p. Based on the value of Quindell’s total assets, and making certain assumptions, Quindell stock trades at a 17% discount to fair value, according to my calculations. The shares deserve attention, in my view.
There are problems with the business. The cash flow statement signals massive swings in account receivables, while poor working capital management indicates that the group can’t self-finance its short-term operations but must rely on external funding options to operate as a going concern.
The failure to pursue a listing on the main stock exchange in the UK wasn’t easy to digest for shareholders, particularly because it left Quindell with limited funding options. Faced with stiff competition, this insurance claims processor may find it difficult to raise new funds if its cash flow doesn’t grow at a faster pace. In fact, refinancing risk is an issue, given that Quindell’s debt maturity profile isn’t reassuring — although Quindell stated that its resources would suffice to meet budget requirements.
All these elements are already priced into its shares, though.
Valuation
Quindell stock trades at 2.5x and 1.5x adjusted operating cash flow for 2014 and 2015, respectively. Revenues are expected to double in the next couple of years, but Quindell’s sales multiple is a low 0.6x into 2015, which doesn’t really reflect the full potential of a business whose accounts show hefty operating margins and a steep growth rate all across the P&L.
These trading multiples indicate distress, rather than a growth story. Quindell stock may well be oversold. The group has recently reiterated the view that : a) revenues of up to £900m will be achieved this year, which points to a steeper growth rate in the upcoming months; b) the speed at which credit are collected is getting better.
There is talk that its key joint venture with RAC may implode but that, too, is priced into Quindell stock — a stock that is not for the faint-hearted.
