With Quindell (LSE: QPP), you know what you get: a high-risk equity investment.
As we wait to hear news about cash flow projections and business prospects, opportunistic investors may be tempted to buy Quindell stock at 160p. A trading update for the quarter is due “on or before 15 October”.
The way things stand, the shares price in any possible bad news — and although management have yet to prove that Quindell’s cash flow and working capital management are under control, the stock looks like a compelling buy at this level, in my view.
Here are three scenarios, according to which Quindell may be valued between 300p and 120p a share.
Quindell at 300p
In a best-case scenario, Quindell stock may run to 300p, for an implied 87.5% upside.
1) Quindell management must reiterate that they continue to have positive relationships with clients, and a healthy pipeline of contracts, including new joint ventures.
2) The value of its current and long-term assets rises as cash flow rises, too. No write-downs will be announced.
3) Quindell has limited funding options. A listing on the main stock exchange in the UK is ruled out, but Quindell should provide an update on its intention to pursue a US listing.
4) Quindell’s growth rate will surprise investors if revenues for the year come in at £1bn, rather than at up to £900m. That would point to a steep growth rate in the second half of the year, yielding a stellar growth for earnings per share (EPS).
Quindell at 210p
This is a base-case scenario. At 210p a share, Quindell stock would trade around fair value, in my view. That would imply a 31% upside.
1) Quindell management must provide evidence that their portfolio of clients is growing and the pipeline is healthy.
2) Cash conversion cycle improvement and no write-downs will be announced.
3) Management must state that banks and/or institutional funds are willing to provide new funds when the extension of existing debt facilities is due next year.
4) Revenues of up to £900m will be achieved this year, meaning market-beating EPS growth will be delivered.
Quindell at 120p
This is the bear-case scenario. At about 120p, Quindell stock would trade just in line with the value of its current assets. This scenario implies a 25% downside for shareholders.
1) Quindell may struggle to retain core clients, and more RAC-like news will emerge.
2) The value of its assets may come under scrutiny as receivables aren’t promptly converted into cash.
3) Management may not be able to find banks and/or lenders willing to back them up when the rollover of existing debt facilities is due next year. As such, a cash call may have to be considered.
4) Management won’t meet guidance for revenue and earnings.
