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Why Quindell PLC’s “Low” Valuation Is An Illusion

What do people mean when they say Quindell (LSE: QPP) shares are cheap?

They usually mean the shares are on a very low price to earnings (P/E) ratio, and quote a figure of something like 2 based on the company’s expected 2014 figures. A P/E like that is exceedingly low compared to the FTSE 100 average of around 14, and if Quindell is as healthy as the average FTSE company, then its share price should surely be around seven times the current level of 123p — which is £8.60!

The most recent 72.5p EPS forecast consensus for 2015 even indicates a forward P/E of 1.7, which by the same reasoning would suggest a share price of over £10!

Stale consensus

But that consensus was three months ago, and since the PwC investigation into the company’s accounting practices and financial situation was announced, all forecasts have been withdrawn. There hasn’t been a broker’s recommendation since October. Even then, of only four forecasters, three were associated with Quindell itself.

Cenkos Securities is the firm’s current broker and AIM nominated advisor. And we never listen to a company’s own broker when it comes to forecasts, as they’re pretty much obliged to wax positively if they want to keep the job. Besides, Cenkos has come under criticism of its own for signing off on some of Quindell’s most misleading RNS releases.

Canaccord Genuity was the company’s joint broker and advisor, but resigned from the job back in November and hasn’t issued any forecasts since. Again, we’d really be wise to omit Canaccord’s recommendation from our deliberations, and that’s even without the resignation — I’ll leave you to decide what to make of that.

Daniel Stewart made money from supplying Quindell with broking, advisory and research services — the firm took warrants as part payment for its services, but has since exercised them and sold. Again, very much not a disinterested party during its association with Quindell.

Historic, surely?

But what about those historic earnings per share figures which showed storming rises and are expected to reach 58.4p per share for 2014?

Well, the problem there is that those figures have not been based on actual realised profits or cash, but instead on Quindell’s accrued profits estimations. That’s not even business invoiced but not yet paid — with Quindell’s insurance claims business requiring it to pay to take on cases that it might not ever get round to billing, it’s based on predictions of the profit it might someday get from business it can’t even charge for yet.

And that’s what the PwC investigation is all about. Numerous experts have seriously criticized the amount of accruals that Quindell has been claiming, with some opining that they are significantly higher than the industry average. PwC will hopefully give us some realistic figures, and who knows, Quindell might have been spot on with its estimates all along!

But if it turns out like that, I’ll eat my hat. In fact, I have nine hats and I’ll eat them all, together with a couple of pairs of shoes.

Wait for it…

The bottom line is that, while we know the P that goes into the P/E ratio, we have no idea of the actual E whatsoever, and any attempts to put a figure on it are currently illusory. If anyone tries to tell you otherwise, spit in their eye. And wait for the report.

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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.