Quindell PLC: The Dirty Truth

quindellI wrote an article with this exact same title back in May, when I thought the tactics being used by Gotham City Research in its excoriation of Quindell (LSE: QPP) were somewhat underhand — Gotham was slagging off a company when it would benefit from a falling share price, and short-selling had started before the report was released.

But while I still don’t like that approach to company analysis, my opinion on Quindell has done a U-turn.

Bought and sold

I added some Quindell shares to the Fool’s Beginners’ Portfolio in June, but subsequent developments made me question that decision. And after the company’s third-quarter update on 13 October, I decided it was hot potato time and I dropped it.

The big problem is that Quindell is a supposedly growing company that has got where it is by acquisition, and it’s apparently still in early days when it comes to profits. But it’s talking and acting like a has-been that’s desperate for cash, with cashflow being so far behind recorded profits that it’s surely the cause of soiled underwear wherever investors meet.

The much-vaunted (“worth £1bn”) RAC telematics roll-out was canned, essentially because the cash was not there to pay for it.

Disposals? What?

And then there’s that Q3 update. As well as the discomfort I’ve already described, I was also disturbed to hear that the company is considering the “disposal or demerger of assets or divisions” as one of its options for “maximizing shareholder value” (which I read as meaning it needs cash).

Quindell crowed about achieving adjusted operating cash flow of approximately £9.4m in the quarter, but that’s against gross sales of £200m and EBITDA of £83m. And the “adjusted” bit means it has not accounted for any exceptional costs, tax or interest.

There were net funds of only £25m in the bank, the same as at the halfway point. The firm’s interim report had recorded cost of sales of £161m and administrative costs of £57m, and with cash flow being so far behind revenues and profits, the company’s ongoing liquidity must be in serious question — there have already been reports that it is increasingly delaying the payment of its trade creditors.

Then there’s the latest from Gotham City…

Built on Quicksand?

After the release of Quindell’s Q3 update, Gotham told us that its previous valuations of the company now “seem rather high” — it had previously suggested 45p per share, with the market currently valuing Quindell shares at 152p!

Gotham went on to tweet “Per Quindell’s trading statement & financial highlights released today, we believe #QPP is behaving as if it is at high risk of bankruptcy“.

The more I read about Quindell, the harder it gets for me to disagree — but for the sake of shareholders, I still hope I’m wrong.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.