Quindell - A Look at the H1(2014) Results, Cash Flow and Rumours.

Quindell's 2014 H1 results were (in my humble opinion) excellent! 

Now, that's not a statement I would make hastily about any set of results, but once again Quindell have managed to pull out another great set of results against a backdrop of wide negativity regarding the stock and aggressive shorting tactics from hedge funds. 

For those interested the results can be found here: 

http://www.quindell.com/images/uploads/irdownloads2014/20140821_IR.pdf

I'm going to try and discuss a few things regarding this set of results, including, but not limited to:

1. Cash flow, its common misunderstandings, how we need to look at it in the case of Quindell and any possible solutions that the company may employ in the short term.

2. What this set of results means for common investing metrics (PE ratios, etc). 

3. The allegations of fraud.

As a disclaimer, I do have a long position in the stock and am a strong believer in the prospects of the company; nevertheless, this doesn't mean I wear rose-tinted glasses when it comes to analysing the company, which I think could do with a better investor relations and public image team.

1. Cash Flow

- The fist bugbear I have regarding the bearish argument regarding low cash flow, is that many people seem to talk about it in the context that it's a finite amount per half or quarter year:

This may be an incredibly basic point, but just because we know what the cash position for the company is unto June 30th, doesn't mean that the company has not made a huge amount of marginal cash flow since then. So, you see that just because we know about £85 million worth of cash doesn't mean that in reality the company presently has significantly more in percentage and real terms post results.

Now, based on this quote from page four of the results:

"Underpins our 2H operating cash flow expectations of c.£30-40m, and our 1H 2015 expectations of up to £100m"

We can clearly see that the company is expecting between £5-6.6 million pounds per month in the second half of 2014, meaning that in July and August it's likely brought in £10-12 million on top of the £85 million we heard about in the results - roughly an 11% increase since June 30th using those figures.

- Journalists seem to be focussing on the net funds of £18.9 million stated in the results, which is frankly ridiculous, because vast amounts of companies have much higher debt ratios. Look at the results from Nike or Accenture for example. 

My point here is that it's highly likely that the media has been intentionally talking about net cash flow, because it's the smallest cash related number they can see - in the grand scheme of things operating cash flow is much more important.

- My final point regarding cash flow is that Quindell is a rapidly expanding company and that people who purchased shares under the expectation that they would be able to generate huge cash flow figures in tandem with other growth metrics perhaps need to rethink their investment strategy. 

Now, Quindell have said that they're reducing their growth outlook in order to focus on cash flow, but regardless of this, the nature of growth companies is that they're initially very cash intensive. This isn't to say that businesses have to suffer from low cash flow in order to grow, but it does mean that generally if you want to see a fast increase in shareholder value you have to be prepared for a significant lag in cash flow against profit and revenue growth. 

- What might Quindell do to ease this issue in the short term?

Well, this is an idea I actually nicked from a poster called QPP1000 on the LSE Quindell share chat (I highly recommend his posts for investors who haven't seen them), which is that they may consider placing some shares to a major institution (say fifty million), this would have the effect of making them significantly more cash positive, but also increasing investor sentiment by having another large institutional name to add to the current list.

Personally, I think that the current board of directors are more inclined to focus on the business and hope that over time this will drive growth in the share price. Nevertheless, I am very pleased to see that they're pursuing suing Gotham City Reports and other bloggers for defamatory claims, which I think is a very positive sign that the company is fighting back and possibly means that they may be more inclined to view these as viable options in the short term.

2. Investing Metrics

There's a bit of a danger here in going overboard, so I'm going to try and be concise here and keep to the popular investing metrics.

- Using the adjusted earning per share figure featured in the results of 29.60p and a share price as it stands as I look at it (literally as I'm writing this) of 170p, we get a half year PE ratio of 5.74, or a full year PE ratio (if we double the EPS) of 2.87 and realistically we should probably more than double this figure as Quindell always delivers more EPS in the latter half of the year. 

I ask you, is this a sensible PE ratio for a company that has a very strong growth outlook? 

Well, in my opinion the answer is a strong "No". When you usually purchases shares in a rapidly expanding company most investors will take a higher PE ratio than normal in the knowledge that the continuation of high revenue and profit growth levels in that business will allow room for significant growth in the company's share price. 

- Next we have to look at the potential for dividends (after all this is where most holders of Quindell intend to make their money).

With a profit before tax in H1 of 2014 of £153.7 million against an H1 figure in 2013 of 39.2 million, it's clear that there is a lot of potential for releasing a good dividend at some point this year. I have already done a write up which discusses this in reasonable detail, so I would encourage people to read this post:

http://themaskedaimtrader.blogspot.co.uk/2014/07/quindell-plc-frustrating-but-stay-with.html

The fact that Quindell has a current dividend cover of over 25 times suggests to me that there's a lot of scope for significantly increasing this dividend and the fact that the company has pulled back on the growth slightly to allow cash flow to catch up means that there's likely to be much more available cash to release a strong dividend this year compares with last year's dividend.

3. The Allegations of Fraud

- The Ponzi scheme argument is the most ridiculous "de-ramp" of Quindell I have ever seen and I seriously thought that I had seen all of them by now. 

If we approach the idea that Quindell is a massive Ponzi scheme from a logical perspective, it simply doesn't make any sense. For Quindell to be fraudulent in any sense they would have to have fooled not only members of the top ten insurers in the UK (Aviva, etc), but also some of the largest companies in the world (British American Tobacco, BT, EDF Energy, etc).

More than this, they will also have fooled huge fund managers like Fidelity, AXA, M&G and Artemis, which have whole teams dedicated to doing due diligence on high growth stocks like Quindell in portfolios.

Overall, this makes the chance Quindell being a company based around Ponzi fraud very low in my opinion and the arrogance of certain other bloggers to believe that they can out-analyse the analysts of these huge institutions is laughable. 

- Secondly, we have the allegations of altering results to present a different picture to shareholders. 

This is almost as illogical, because you're then implying that the company's auditors (KPMG) would allow their name to fall into disrepute in the event that they got caught out. Considering that KPMG audit many FTSE 100 companies, I highly doubt that their likely to risk the custom of companies capitalised in the hundreds of billions of pounds to serve companies worth two billion pounds or under. 

- The RAC deal is one that I'm not overly familiar with as I bought into the company post the Gotham City Report, but again this is an issue that can be logically explained. 

We all know that the RAC have an IPO coming up and therefore will be extra-stringent regarding the dispensation of knowledge that could impact upon their performance on the IPO date and as the large company in the deal, Quindell will ultimately have to wait until the RAC give to go-ahead before they can comment on the rumours.

Also, we have to remember that issues with the RAC deal were reported by media outlets like This Is Money and the Financial Times and we all know that media outlets are prepared to spin stories if they think that people are prepared to read them. In this case This is Money said:

 "The deal between the two in its original form is also now considered unworkable, sources said," 

While the FT said:

"talks about restructuring the tie-up have stalled, said people familiar with the project."

Let's be honest, "sources said" and "people familiar with the project" are about as credible sources for information as my labrador is. This looks to me like the continued disgruntlement from the media after they were barred from the AGM and I implore trigger happy investors and traders to ask themselves if they believe a source is credible every time they read it. 

I think that in conclusion, if there are a few things we can take away from the past few weeks, it's that Quindell share holders and traders in general would do well to look at the likely authenticity of news before they trade based upon it. Secondly, current stake-holders in the company should not be disheartened by the languishing share price and remain confident and inline with the excellent results we saw yesterday and thirdly the cash flow argument needs to be seen from the perspective of a young company based on its past and future growth rates.

Quindell plc - a more in-depth financial valuation.

After the very popular post I did on share consolidations and the effects this would have on the popular share Quindell plc (who deal in insurance outsourcing and telematics), I decided that there could be a demand for a more in-depth look at the company from a variety of different valuation perspectives (my favourites). All of the information is my own opinion; I don't have a licence to give financial advice so please do your own due diligence.


I've discussed before the shorting attack on Quindell, so I won't repeat myself on that front, but if anything good can have come from the attack it was that it's made the valuation metrics really look quite outstanding:

1. Dividends:

- With the first Quindell dividend awarded in 2013 of 0.1p per share pre-consolidation or 1.5p post-consolidation, the market sentiment feels like it still hasn't been able to adjust to the diverse nature of the company: Quindell is currently both a strong growth and income generating investment and to define it as merely one or the other would in the current price range be a very dangerous statement.

- With a dividend cover of 25.35 for that first dividend, it was made quite clear that Quindell are likely to take the "less is more approach" and surprise investors with better financial results in the future rather than set them up for a fall. 

2. "Trend is your friend":


- There's no doubt that Quindell has been able to generate some formidable revenue and operating profit figures:


Revenue:                                                            Operating Profit:
2010= £150,000                                                 2010= £-80,000
2011= £13,710,000                                            2011= £4,130,000
2012= £163,000,000                                          2012= £36,460,000
2013= £380,130,000                                          2013= £108,500,000
2014= £?                                                            2014= £?


- I'm not going to conjure any numbers from the air to predict what the final results for 2014 will show, but if the trend continues (and there's no fundamental reason for why it shouldn't, as Quindell has been gaining custom and not losing it over 2013 and the first half of 2014) we could see some very pleasing numbers at the end of their financial year.


- Also, let us not forget this new nugget of information, which will almost certainly help Quindell to increase its next results to all time highs: Run-rate revenue forecasts from the legal services team have increased up to £900m per year in the second half of 2014 (an increase from £650m in the first half of 2014).


3. Total Assets:


- One of the many things that I've struggled to understand since the shorting attack is why the company has traded so close to the value of it's total assets. With a total asset figure of £881,480,000 in 2013 it's staggering that Quindell still only has a market capitalisation of just over £1bn.


- Most companies trade at a reasonable multiple of their total assets, but the insurance sector seems to be the odd one out in this case, where Admiral group trade at 1.22 times their total assets and Quindell currently trade at 1.13 times their total assets.


- This makes little sense to me when we consider that although this isn't an undemanding business in asset terms it's certainly not hugely asset intensive (we're not talking about mining or manufacture). Also, accountants will know that valuing uniquely placed assets (like telematics in general) can be very difficult. This means that the total asset figure we see in the 2013 accounts could in theory be a lot higher, but that in accounting terms the rules are against us (for example, football clubs can't grant a value to "home grown" players on a balance sheet, because the only way to value them as an asset is based on what someone else has previously paid for them).


4. "Cash is King":


- This has been the only consistent criticism that Quindell has attracted since its infancy and although it's lagging cash flow is not a point to ignore, even this looks set to turn around by the end of 2014.


- Cash generation is now at £500,000 per day, with forward predictions of £750,000 per day by the third quarter of 2014 and £1m per day by the year end. If this is also an underestimation (likely join on Quindell's previous estimations) then the company will be significantly cash flow positive by the end of the year at least - hardly something to worry about for long term investors.


5. Price to Earnings Ratios:


- Quindell is currently running on a PE ratio of about 8 and a forward PE ratio 4. This forward ratio of 4 is particularly interesting, because it's been made in accordance with the estimations put forward by the company itself, which as I've already said have a tendency to be underestimates. This means that in reality we could lean on a forward PE a quite a bit closer to 3 than 4.


- If we compare the current PE ratio to other standard insurance brokers in the FTSE you get a pretty interesting picture:


Admiral: 14
Aviva: 23
Direct Line 12
Esure 49


- Apart from being a bit ironic that Quindell currently has a PE of 8 when Esure has a PE of 49 even though they currently have almost exactly the same market capitalisation, what we need to take away from this is that Quindell is seriously undervalued compared to it's dividends:


-To start with, as a company that is a leader in the new and very quickly evolving sector of telematic insurance it really should be Quindell that has the PE of 49. Secondly, when the insurance outsourcer (Quindell) has a better PE ratio than it's clients (Direct Line), there's a serious valuational issue going on.


Conclusion:

Regardless of what others in the market are saying, Quindell plc is in my eyes considerably undervalued within the current price range. Adding to this, I feel that it's the nature of the company to under estimate and over deliver, meaning that overall Quindell is likely to continue to deliver better results as 2014 progresses.


We await the interim results with bated breath.


Good luck and please comment if you feel I've missed something essential,

The Masked AIM Trader.