It’s just about a year since Quindell (LSE: QPP) made a £200m placing of shares “to fund growth opportunities” at a share price, adjusted for the subsequent 15 for 1 consolidation, of 240p. As I write, they are now trading somewhat below 80p, less than a third of their value 12 months ago. If you were unlucky enough to have bought as they reached a peak of over 650p earlier in the year, you’ll have seen nearly 90% of the value of your investment destroyed. Such share price gyrations may not be exceptional on AIM, but Quindell had ambitions not so long ago to join the FTSE 100. Not even the dogs of that index have suffered such a roller-coaster ride and destruction of value.
I’m fortunate to be able to stand back and observe dispassionately as someone who has never been a shareholder. Even for us bystanders, it’s instructive to learn from what has gone wrong, and I suggest it’s time for existing investors to form a view whether the share price will now ever recover.
With a story as complex as Quindell’s, you either have to take a broad overview or comb through the minutiae in fine detail. So this is an attempt to distil from the Quindell saga the core problems that have done for the stock. I believe there are three:
Call it Opacity, call it Opaqueness, it’s not clear
Nobody could accuse Quindell’s investor communications of being over-simplified. Just the difficulty of understanding what the company does and how it makes money would be a sufficient red flag for many. Quindell still describes itself as “a provider of sector leading expertise in software, consulting and technology enabled outsourcing” and its shares are listed in the Technology sector.
But 80% of revenues (at the last half-year) come from its professional services division, leading the Financial Times‘ Alphaville Blog — which has been playfully running a series called ‘What is Quindell?’ — to describe it as the UK’s largest listed law firm.
High-octane acceleration, with little ballast
Quindell’s fantastic rates of growth in revenues and profits are what have made it, at least superficially, attractive to investors. But there have been plenty of warning signs. Much of the growth has been fuelled by acquisitions — sometimes with connected parties. There have been questions over the accounting treatment of revenues. And cash flow, the acid test of a business model, has been talked about more than it has been banked.
Being too clever by half
The latest upset to befall Quindell’s shares arises from its directors’ share dealings. It transpires a number of AIM company directors have sold or pledged shares whilst appearing to be buyers. Boards and Nomads alike have much to answer for and the shares have rightly been punished — but none more so than Quindell’s. The company has form, having confused investors over a share derivative transaction in April last year. Added to question marks that have been raised over other corporate transactions, investors are applying a credibility discount.
In most companies these problems would lead to one conclusion: a change of management. Whether that transpires at Quindell remains to be seen, but one thing is certain: a new CEO would start with the mother-of-all kitchen sinkings. I fear my prognosis for Quindell shareholders is poor.
