US Edition Quindell
184¼p-26p
Questor says SELL
QUINDELL’s [LON:QPP] first-half results yesterday showed heavy investment in the pursuit of growth. However, Questor is still of the opinion that the shares are too risky a bet for any retail investor.
The Aim-listed company is growing rapidly by providing lawyers, care hire, repairs and medical checks when people claim on their insurance.
In order to accelerate growth, it raised £200m net of expenses from investors in November last year. The company aimed to take on more personal injury claims from car accidents, and industrial hearing loss (IHL) cases from workers.
Quindell has to pay insurance companies upfront for each injury claim. It then takes about six months to resolve crash cases and up to 18 months for IHL before they receive payment. Quindell makes an estimate of how many cases will be successful and then recognises the revenue in advance as the teams of lawyers raise fees for their work. Once the case is settled, the cash should flow back in.
That profile of cash out early, revenue up and then cash in later helps to explain the results. Revenue more than doubled to £357.3m, and pre-tax profit more than tripled to £123m, giving earnings per share up from 11.8p to 30.1p during the first six months ended June 30.
Because Quindell is paying for the cases, the company spent £115m in the first six months, reducing the net cash from about £200m at the start of the year to £85m at the end of June. The difference between the growth in revenue and profits, and the lack of cash is made up by the rapid growth in debtors. The debtors more than doubled to £561m, with accrued income – or revenue taken in advance – more than tripling in the first six months.
Analysts from Exane BNP Paribas estimate that about £135m of the debtors relates to IHL claims at the end of June. The analysts estimate Quindell has already recognised more than half of the £9,000 settlement on each case, or about £60m of the £156m in first-half earnings before interest, tax, depreciation and amortisation (Ebitda). None of these cases has yet settled and insurance firms say up to 80pc are rejected, according to BNP.
Quindell management said it only accepts a quarter of all cases and expects it to be a profitable area of business.
The cash spent in the first half means the debts at Quindell were also up, to £66m at the end of June from £59.4m at the start of the year. That leaves the company with net funds – cash less total debts – of £18.9m at the end of June.
Rob Terry, executive chairman and founder, told Questor the company was operating cash positive in July. He added that the company should generate about £35m in operating cash in the second half. Mr Terry was adamant that there will be no further acquisitions this year and that there was “absolutely no need” to raise more cash in the year. In fact he said with more than £100m in operating cash inflows expected in the first half of next year, with shares at these levels the company will look at share buy-backs.
The problem with using the operating cash number is that it is quoted before tax, dividends and other spending on property. While Quindell is recognising revenue and profits in advance before the cash is received, it is being charged tax. Investors may be willing to wait for returns, but the taxman is less patient.
Corporation tax cost £23.3m during the first half, and analysts from broker Cenkos expect a full-year cash tax charge in the region of £43m, or another £20m.
In April, Quindell signed up to a joint venture to install “black boxes” that record RAC driver data to reduce the cost of insurance. It was valued at £1bn and Quindell called it “potentially the largest telematics rollout globally”.
But yesterday Mr Terry said the telematics joint venture with RAC was “hardly a focus” and wasn’t material to the group’s earnings.
Questor believes the shares, trading on 3.8 times forecast earnings, are a value trap. Shareholders are now completely reliant on the guidance on cash flow and earnings to support the share price.
The shares have fallen 65pc from our sell recommendation (551p, April 1, when adjusted for a 15-for-one share consolidation). There is still too much risk here. Sell.