How “New” Quindell PLC Is Shaping Up

One-time FTSE 100 hopeful Quindell (LSE: QPP) recently fessed up to running “aggressive” and “not appropriate” accounting policies in parts of its business (RNS, 30/3/15). Shareholders are set to vote this Friday on whether to accept a save-the-day cash offer for most of their company from Aussie firm Slater & Gordon. They look sure to vote in favour of the deal.

This article is about the businesses Quindell will have left.

The Board has told us that the retained businesses generated profit before tax (excluding exceptional items) of £6.8m in 2013, and £8.5m in H1 2014 (RNS, 1/4/15).

Non-core

Some of the retained businesses are non-core for the Board’s vision of “new” Quindell, and management will seek to dispose of them. Is there any value in them?

Well, Quindell’s collection of gas, electric and telecoms broking businesses — which include Business Advisory Service Limited, UK Sun Limited, Utility Switch Limited and Utility Supplier Services Limited — did EBITDA of £1.8m in 2013 with £3m anticipated for 2014.

Similarly, Quindell Property Services — which includes Brand Extension (UK) Limited, BE Insulated (UK) Limited, QPS Energy Limited, QPS Scaffolding Limited, QPS South West Limited, Sunlite Solutions and the assets of Loft Space Insulation Limited — did EBITDA of £1.4m in H1 2014.

On the face of it, then, in addition to the cash coming in from Slater & Gordon, there could be some modest cash inflows from non-core disposals if the kind of earnings numbers quoted above are clean.

Core

Ultimately, the remaining core of new Quindell “will comprise a range of technology businesses with strong growth potential, in particular: connected car and telematics (Himex, iter8) … ; insurance claims management systems (Quindell Enterprise Technology Solutions) … ; and insurance brokerage utilising technology and telematics (Ingenie)” (RNS, 30/3/15).

The table below shows some financials for these core businesses; specifically, acquisition costs and profit before tax (PBT) for 2013.

_{(1) Acquisition cost (Annual Report 2013, p. 84, 85, 90; and RNS, 14/7/2014). PBT: Himex posted abbreviated accounts (no P&L statement) claiming small company exemption; previously posted full accounts for 2012, recording a profit before tax of £512 (Companies House).}

_{(2) Acquisition cost (RNS, 21/7/11; RNS, 12/4/12; Annual Report 2013, p. 84, 85, 90; and RNS, 14/7/2014). PBT: Ingenie posted abbreviated accounts (no P&L statement) claiming small company exemption; previously posted full accounts for 2012, recording a loss before tax of £1.3m (Companies House).}

_{(3) Acquisition cost: “agreed valuation” (RNS, 18/4/13). PBT: for 8.5 months post acquisition (Quindell Annual Report 2013, p. 80).}

_{(4) Acquisition cost: “IT-Freedom, now ‘Quindell Enterprise Technology Solutions’ has been acquired by the Group at a valuation of £9,465,640.28p” (RNS, 24/5/12). PBT: for full year (www.duedil.com/company/04500346/quindell-enterprise-technology-solutions-limited/financials).}

There’s something of an oddity in the table in the shape of the £26.4m 2013 PBT of Quindell Enterprise Technology Solutions (QETS). As mentioned earlier, we’ve been told that the PBT for the entire retained businesses for 2013 was £6.8m (excluding exceptional items). Is the QETS PBT an error, or does it include some very large exceptional item(s)? If the QETS PBT is correct and doesn’t include some very large exceptional item(s), it would suggest that there were some hefty losses elsewhere within the retained businesses. The non-core operations I’ve looked at don’t appear to have been major loss-makers, which leaves Quindell’s biggest acquisitions, Himex (bought for £165.3m) and Ingenie (bought for £55.2m), as the potential culprits.

For 2014, we have no profit numbers at all for the component parts of the new core business. All we know, as mentioned earlier, is that PBT for the entire retained businesses for H1 was £8.5m. This would be consistent with profit growth at iter8 and QETS (and some non-core businesses), and a continuation of the mooted hefty losses at Himex and/or Ingenie — but is merely supposition.

Foolish bottom line

As things stand, then, we are really in the dark about the profit-generating capacity of the new core Quindell — the success of which the Board says “will require some prudent capital investment supplemented by the cash flow such businesses produce themselves” (RNS, 30/3/15).

As such, I am not surprised that — at this stage — the market is valuing Quindell at only a modest premium to the cash (up to £500m, initially) that the Board intends to distribute to shareholders from the Slater & Gordon deal.

I would suggest that investors need a lot more in the way of hard numbers on new Quindell — particularly Himex and Ingenie — to be able to make a considered valuation of the business that will be left after Slater & Gordon and non-core asset disposals have all played out.