This year’s shorting attack on Quindell‘s (LSE: QPP) shares is an attention grabber. The firm describes itself as “the largest technology enabled claims management outsourcing business to the UK motor insurance industry” among other things, and trades on a forward P/E rating around two for 2015 at today’s 173p share price.
City forecasters reckon Quindell will grow its earnings by around 43% this year and a further 50% in 2015. However, reading a report published earlier this year by Gotham City Research leaves us scratching our heads about whether to believe Quindell’s earnings’ figures.
Gotham’s report catalysed Quindell’s share-price plunge this year and essentially has it that the apparently fast-growing company’s figures are a sham — something that Quindell denies.
Bargain or barge pole?
Quindell’s growth is apparently driven by its acquisitions of legal, medical, vehicle accident repair and other companies in order to deal with all aspects of insurance claim. The firm’s legal services arm seems to generate most revenue, and the firm talks of black-box type technology improving client systems and the like.
However, rightly or wrongly, I can’t help thinking about call-centres full of operatives hassling vehicle-accident victims over making personal injury and hearing claims. I don’t know if that’s the kind of thing that Quindell’s operations revolve around or not, as Quindell’s website and its communications with its investors both seem wooly — appearing to lend weight to Gotham’s narrative, and not doing much to help me if I’ve mis-interpreted Quindell’s operating model.
The firm’s headline growth record seems impressive:
|
Year |
2009 |
2010 |
2011 |
2012 |
2013 |
|
Revenue (£m) |
0.09 |
0.15 |
14 |
163 |
380 |
|
Operating profit (£m) |
(0.44) |
(0.08) |
4 |
36 |
109 |
The trouble is that cash flow and receivables figures are ‘all wrong’ and work against the potential for a nice glowing feeling that we hope to get when a growth company ‘clicks’:
|
Year |
2009 |
2010 |
2011 |
2012 |
2013 |
|
Net cash from operations (£m) |
(0.28) |
(0.01) |
4.45 |
14.61 |
(8.94) |
|
Trade and other receivables (£m) |
0.51 |
1 |
32 |
178 |
328 |
That revenue and operating profit is not manifesting as cash flowing into the business. We can see that receivables are stacking up, which means customers have yet to pay for most of Quindell’s sales, despite the firm booking those profits already.
How does Quindell trade without cash flowing in?
Cash does flow into Quindell but not from operations. The ‘net cash from financing’ line in the accounts record tells the story:
|
Year |
2009 |
2010 |
2011 |
2012 |
2013 |
|
Net cash from financing (£m) |
(0.07) |
(0.04) |
1.73 |
71 |
216 |
Debt and equity injections keep the wolves from the door. A typical transaction is the £200m share placing the firm carried out last year to fund future growth.
If Quindell’s customers pay up and the cash flow gets going, the firm could start to look like a decent growth play. If such payment depends on insurance companies settling against claims, there could be a significant delay. In the meantime, a fallen share price for Quindell could make future fund-raising more difficult.
Investors here should keep an eye on Quindell’s cash flow and cash reserves.
