US Edition Quindell
36¾p-2
Questor says SELL
QUINDELL has more than doubled revenue and profit in the past year by offering to cut costs in the motor insurance industry. Questor is concerned that kind of rapid expansion brings risks.
The motor insurance outsourcing company has acquired legal services, car hire, car repair, technology and health care businesses during the past two years. The idea is that by combining all these services in one place, Quindell can operate them more efficiently and hand back savings of up to 20pc to the motor insurance industry.
The insurance industry has been hit by soaring personal injury claims that have destroyed profitability, so any cost savings are welcome. Quindell has experienced strong demand for its services. Revenue more than doubled to £380m, pre-tax profit more than tripled to £107m, and earnings per share jumped from 1p to 1.98p during the year ended December 2013.
The gap between profit growth and earnings per share growth is the first warning sign. The reason earnings per share has increased 98pc compared with pre-tax profits up 202pc is that Quindell is funding expansion by issuing shares. The company had about 2bn shares in issue at the start of 2012, 3.6bn in early 2013, and about 6.2bn shares in issue today.
Investors don’t get diluted when shares are issued as long as the acquisitions deliver quality earnings growth. The problem is the quality of those earnings often only becomes apparent many years down the line.
Quindell is a very cash-hungry business and that is the second warning that is making Questor uneasy. The company reported operating cash flow of £10m during 2013, on revenue of £380m, and debtors during the year increased to £327.8m from £177m a year earlier. The reason for the cash strain is that Quindell has to pay upfront for car crash cases and then it takes about six months to resolve the case and receive payment. In the year ahead, legal cases are forecast to make up about 60pc of group revenue.
The company has made progress on reducing its debtor balances. Quindell collected £270m in cash during 2013 and reduced the amount of time it takes to collect the money. That said, there is still a gap of about five months between upfront payment and it collecting cash.
The company argues that it is simply investing in growth. Questor thinks it looks like the company is doubling down and going all out for growth. This may prove wise but it is risky for shareholders.
Speaking in late 2012, Rob Terry, executive chairman, said: “No more fundraising [is] required in 2013 to hit the 3p earnings-per-share targets.” Admittedly, he said that more than a year ago. However, since he spoke Quindell has changed its company name and came back to the market in November last year to raise £200m, net of expenses.
The third warning flag is missed targets. Quindell is some £80m short of previous analyst targets for revenue of £460m for 2013, and the company has also missed Mr Terry’s own 3p earnings-per-share target. Adjusted earnings per share came in at 2.54p for 2013. Then there was the announcement only last October that the company would be moving to a main stock market listing in March alongside yesterday’s full-year results. Mr Terry now says the company will be moving to the main market in early June.
Quindell is a huge favourite with retail investors. The shares are now highly liquid with about 60m of them changing hands every day. The shares have more than doubled from 18p in the year to date and now trade on 11 times forecast earnings per share. Since Questor last said buy (12¼p, August 20) the shares have tripled in value.
In Quindell’s stock market results statement, the words “proof” and “validated” are mentioned on no fewer than six and four occasions respectively with regards to the strategy and results. Questor isn’t so easily convinced and the warning signs are that the risks have risen markedly. There could be stunning growth ahead for the high-risk investor, but Questor cautions against betting too much on this high octane horse. Sell.