Quindell - Rumours and Their Logical Progressions

Good morning,

N.B. This is a speculative article until any RNS' have been released!


I'm very pleased with the Q3 results Quindell released yesterday morning! So pleased that I'm not going to bother discussing them, but instead focus on this piece of potential news or rumour (depending on what you want to believe):


http://www.cityam.com/1413248976/quindell-chairman-mulls-break-unlock-value


To quote the article: 


"Quindell has already been ap­proached with a £140m offer for part of its business that generates just four per cent of its profit, City A.M. understands."


Now, the term "City A.M. understands" possibly means that it was mentioned under the radar by the company or alternatively that they have a source somewhere within Quindell. This being said we cannot rule out falsehood - the source as we know so far is after all the media, who aren't generally known for telling the truth before telling a good story. 

In the event that this is true (and I suspect it may be, because I Tweeted the writer and got this reply), I would suggest that two points be tackled with this sudden cash inflow:


Oliver Smith ‏@OliverSmithEU  4m

4 minutes ago

.@ProAIMTrader I can’t. But the business division in question wouldn’t be of a dissimilar size to Quindell’s Connected Home unit

1. Perform some form of share buy-back

- If you split the £140m straight down the middle, Quindell would be able to buy back around 46.6 million shares at £1.50. This being said, I would imagine that as soon as this news was released they would end up paying a significant amount more per share, but it would still have the desired effect of scaring off those with short positions.


2. Fix the company's net cash position 

- Personally, I've never been a huge fan of this negative argument, because it seems to be used more in the way of a conspiracy theory that the company is actually run by a Bond villain rather than as an actual point against the company. 

- The company saw the cash-flow problem and they're fixing it - end of.

- My point here would be that the remaining £70m could just remain sat in the bank or used to pay off any overdrafts and debt. This being said, with money being so cheep at the moment the market would probably appreciate it being sat within a bank account for a while before debt begins to be paid off.

I think that what shareholders need now, is some form of official announcement either way regarding this rumour, even if it's not an acceptance of the deal, as this would provide a partial third party valuation, which I feel would help to inspire confidence in the company and in Mr Terry. All the above is my opinion - make of it what you will,


The Masked AIM Trader


P.S. This has been presented to the company as a potential idea.

Quindell - Red Flag Stress Test

Good evening,

Tonight I'm going to look at Quindell (a company I currently have a long position in) in the context of the "red flags" that investors could have found within companies like Southern Cross - a care homes operator once owned by the private equity firm Blackstone that floated in 2006 and then stopped trading in 2011.

I've picked Southern Cross for comparison, because many other commentators on the AIM currently give the impression that Quindell is destined to cease trading in the same fashion and on rare occasions even pick upon both similar and sensible points of reference.

Here are a list of some of the more major signs of weakness that could have been picked up on within the balance sheet and accounts of Southern Cross between 2006 and 2011:

- Serious cashflow issues

- Directors selling shares 

- High leverages

- Customer Diversification

- Rapid expansion 

- Company recommended investment metrics

- High goodwill figures

Thus, I'm effectively going to list and explaining one of the main signs of weakness within Southern Cross (mostly using their September 2008 accounts - although in any year since their floatation these statements probably would have applied) and then seeing if Quindell falls in the same category or not (using their latest set of interim accounts or the last set of full accounts - not including the update expected in a few days time):

1. Serious Cash-flow Issues:

- Now, with Southern Cross they really stumbled with their main customer being the government (via local authorities), which aren't well renowned for paying on time and this impacted heavily on Southern Cross early on. Essentially, their cash flows were not keeping pace with their profits at all.

- This is possibly the most relevant point regarding Quindell, because it certainly was an issue in the past, but with £1,000,000 being taken a day in cash in the fourth quarter of 2014, this isn't likely to be nearly as much of an issue as it used to be. Combined with the fact that in the real world mathematical analysis is non-linear (something I'm struggling with currently with the algorithmic trading platform I'm making), it likely means that if we follow Quindell's track record of exceeding their own targets and expectations it could be higher than this. 

2. High Leverages:

- Looking at Southern Cross, they had a total debt of over three times the total shareholder equity - a vast amount to have relative to the shareholder equity in any company! 

- With Quindell if we're being fair and taking their borrowings combined with their banking overdraft, we only get a figure of £52,900,000 which is tiny compared to a shareholder equity in the latest interim accounts of £929,000,000. 

- Contextually, most people tend to get worried when borrowing levels are in excess of half of shareholder equity.

3. Customer Diversification:

- In the case of Southern Cross, around 80% of their total business came from the government with the other 20% coming from private sources. As discussed in point one, this isn't a healthy for any business and should have been a warning sign of trouble to come for the company.

- To quote their interim accounts, Quindell are "servicing directly over 600,000 consumers each year from 2014" - an undeniably thoroughly diversified customer base. Frankly, I don't think anymore information needs to be added regarding this point! 

4. Rapid Expansion:

- This isn't so much a warning in itself, but in the context of points one, three and seven it makes quite a big warning sign, because it's a facilitator of these two points in particular.

- Looking at Quindell, high growth rates were certainly at risk of being dangerous to the company earlier in its history, but over the past nine months steps have been taken to reduce growth based cash-flow risks and to quote the interim accounts: "Certain contracts being restructured to ensure optimum return on cash resource". This further shows a internal interest in decreasing the overall growth rate to allow for an increase in net cash.

5. Company Recommended Metrics:

- With Southern Cross there was a clear issue with Southern Cross using and heavily quoting their adjusted EBITDA in their accounts - if your basic metrics aren't enough to represent a company then there's clearly an issue! In this case, by sticking behind their adjusted EBITDA they were able to give the impression that the company was doing much better than the other metrics stated, mostly through confabulation of the business model. 

- If we take 2007 and 2008 you would have gotten a nice upwards trend, but when using any other metric you would have seen a much poorer picture. In effect, 

- Through my reading of multiple editions of company accounts, Quindell have never suggested that their business should be valued using an "alternative" or non-standard investing metric - need I say anymore? 

6. High Goodwill Figures: 

- The problem with goodwill in the case of Southern Cross, was that it was twice the total shareholder equity (total assets - total liabilities) - a massive amount and illustrates the buying spree that Southern Cross went on post floatation. The reason this should have made people nervous was because if the value of the assets you're carrying takes a fall then the value of this shareholder equity effectively takes a huge hit. 

- In the case of Quindell, goodwill at the end of December 2013 totalled only £235,600,000, which compared to a shareholder equity figure in the latest interim accounts of £929,000,000 is a very comfortable margin to be working in. 

- Generally speaking, if the goodwill figure is above about half the shareholder equity figure then you should be on edge and checking that the company still fits with your investment strategy.

To conclude, I like to think that I've taken some significant (or actually potentially relevant) "red flags" in a pretty comprehensive and understandable example and then used them to show that, in my opinion at least, Quindell is not showing any signs that investors would be (or should have been in the past) worried.

All the best,

The Masked AIM Trader

P.S. 

I'm in danger of getting in trouble for this, but could this not be conceived as a slightly ironic "red flag":

Self-fulfilling Betas

Good evening (again),


This actually follows on from something I wrote a while ago:

http://themaskedaimtrader.blogspot.co.uk/2014/09/understanding-and-rethinking-financial.html


A recent trend amongst many analysts has been to add something called a "small cap premium" to their beta calculations.

This takes the usual beta calculation of running a load of regressions, taking the gradient of these and then making a beta, but in this case, there is the bizarre additional step of adding a premium because the company is small.


Now, I'm not necessarily against this, but when it's done with a lack of explanation it can be highly annoying and has a tendency to wind me up, because it then requires that your thinking is parallel with that of the analyst's work.

In some cases, it's actually a pretty good idea, because large or small free floats for example, have the potential to effect your practical beta in the event of market worry or crisis, but this does have to at least be stated if you're going to trust the beta calculation you're given.


The bit that's very intriguing though is the idea that a financial beta could actually be self-fulfilling, especially on AIM where the private investor dominates the field.


This requires you making the general assumption that most people only care about betas in times of financial worry - no one is going to care about their portfolio's beta risk when the market is up forty percent.

If we assume that this is true, then a perceived increase in a company's reported beta (because it's given a "small cap premium") then results in a greater sell off when market turmoil increases, as a result of people actively trying to reduce the beta risk in their portfolios, leading to this increase in the beta to be fulfilled and represented.

In short, adding another point here or there has the potential to have a psychological impact large enough to cause the unbacktested or partially hypothetical betas to actually self-fulfill the values set out by the analyst who calculated the beta.

In essence, I say the beta of an asset is higher than it's baseline beta, so in periods of market worry private investors move from this asset to an asset with a lower beta, thus fulfilling in practical terms my increased beta calculation.


I think that the message here is to question figures you're ever given and check that they're in tandem with your investment strategy.


The masked AIM Trader.

Bacanora Minerals: Key Points From The Sonora Update

Good evening,

I'm normally a more frequent writer, but I've been modelling for an art course for the past week and it's limited my time significantly. Consequently, quickly discuss Bacanora Minerals' latest update


Bacanora Minerals' Update (Expansion Plans for Sonora Lithium Project):


Pretty much, I'm just extracting the most important words and phrases from the 01/10/2014 RNS, so that we can summarise it a bit quicker and cut to the chase with any further speculation:


- "it will commence a significant drilling and exploration program in early November"

- "upgrade resource estimated from the indicated to measured resource category"

- "the Company will begin trenching on the Buenavista area of the Megalit concession to provide bulk clay samples for metallurgical testing"

- "the Company has also begun testing for the recovery of lithium hydroxide"

- "The Company is actively working with a number of potential off-take customers for its potential lithium compound production."


In terms of analysis, there's not actually that much to say, apart from "watch this space". This RNS implies that news-flow regarding drilling results will only be a month or two around the corner and news regarding possible off-take partners could be released sooner than this. 

On another note, I'm also impressed by the lock-in agreements that Bacanora Minerals are putting on their warrant exercisers, which is an illustration of savvy directors - see the 10/10/2014 RNS. 

I'm awaiting more funds to purchase more here and I'll probably be looking to increase my exposure to proven resource mineral companies in these more unsettled markets.

Cheers,

The Masked AIM Trader 

Quindell - Top 50 holdings.

Good evening,

I was just sent this piece of information and I felt that it was important to share:



One of those holders (I'll allow you to guess which one - a shareholder in-joke) is a spoof, but regardless, the other 49 are indeed real shareholders, with the most notable being the UK government. Also, this made me laugh and when under a short attack it makes sense to try and find the laughs where they are.

Furthermore, this is perhaps a good lesson in not taking everything you read online at face value...


I hope you all have good weekends,

The Masked AIM Trader

The Biggest Threat to American Retirement Savings

Good morning,

Although I'm English and therefore perhaps won't understand fully the American health care system, I had a great discussion the other day with an American about the Medicare system and the potential threats there are to the savings of those leading into retirement.


The threat I felt was the most prevalent to the wealth of the majority of the retired was that of elderly care costs, which ironically was something that wasn't touched on for even a moment in any of the courses I've attended with asset managers.

The even bigger irony though is that your financial advisor can spend as much time as they like focussed on the creation and maximisation of wealth, only to have it eroded with the return on equity levels they've dreamed of delivering for their customers.


The reason that I feel elderly care costs are such a potential wealth time bomb in the USA is because currently there is no health insurance that covers elderly care costs. According to Bernard Krooks (the USA's nationally recognised expert in elder and special needs law), the biggest misconception that most Americans have is that Medicare or the government will take care of them as they age, which is simply not the case in regards to chronic illnesses like Dementia, Parkinson's Disease, etc.

This combined with the average cost of elderly care exceeding $100,000 and even exceeding $300,000-400,000 in metropolitan areas, means that even high levels of retirement wealth have the potential to be brought down to soberingly low levels by elderly care costs.

It's not even as if this is a danger to only a few Americans, as it's estimated that 70% of the retired will acquire some form of chronic disease.


I should point out now that (as far as I am aware) Medicare will still cover some of the costs of acute illnesses under something called "skilled nursing care", which would be rehabilitation costs from a heart attack or stroke, for example.


Now, this isn't to say that wealth accumulation isn't important (in my line of work it's incredibly important), but both advisors and clients always need to ensure that the more unpopular discussion points like elderly care costs are discussed, along with other important issues like rights of attorney over the wealth and care of individuals with chronic diseases.

Rights of attorney are especially important to discuss early on with your advisor, because obviously they can't be discussed once a chronic illness has really set in. The Terri Schiavo case should be seen as a warning for us all.


I suppose the best way to sum up this short diatribe would be with a quote from J.M. Barrie's Peter Pan:


"I suppose it's like the ticking crocodile, isn't it? Time is chasing after all of us."


The Masked AIM Trader

Quindell - Reassessing Value At These Lower Levels.

Good Morning traders and investors,


I'm starting to think that Quindell should employ me in their public/investor relations department, as all I seem to think about is Quindell.

I would encourage (as per usual) for people who struggle a little with understanding investing terms along with their pros and cons to have a quick glance at this old post of mine on defining terms:

http://themaskedstocktrader.blogspot.co.uk/2014/07/understanding-ratios-definitions.html


So, here's another look at the value Quindell is offering you numerically at these current prices:



1. PE Ratio:

Taking the current share price of 145p, Quindell is offering a low PE ratio (taking the headline - adjusted EPS) of 3.8 based on the 2013 full year results and a staggeringly low PE ratio between 2.5 and 2.35 based on the official expected EPS range of 57.7-61.7p listed in Quindell's latest release.

Based on the 2013 full year PE ratio, Quindell is currently in about 90th place of the 1209 (according to my data) companies that actually have PE ratios above 0 and on a forward basis for the end of 2014 it comes in a strong 43rd based on the top end EPS and 45th based on the lower EPS estimate.


2. PEG Ratio:

For this ratio I am going to use the forward upper end figure (mainly to save me some time, but also because Quindell have a habit of beating their goals significantly, so I feel that using the lower figures is a bit pointless.

Doing this we find that Quindell is on a forward Price Earnings Growth figure of 0.0379.

Now, that looks wrong but I assure you it isn't, it just happens to be that Quindell is currently priced very low in the market (PEG<1 and the share is priced cheaply in the market).


3. Price to Book Ratio:

Taking a half year net asset book value per share (this seems fair as it limits the counterarguments that are debt related), we get a net book value per share of 0.68, which is a bit ridiculous really, because not only are you currently paying less than the net asset value of the company for shares this figure is also only based on half yearly results and as well all know Quindell went cash positive in July, so much of that debt will have been reduced, putting Quindell in reality much closer to 0.5 and potentially below.


4. Price to Sales Ratio:

Running on the 2013 full year results we got a price to sales ratio of 1.58, but this is high in comparison to the expected 2014 full year price to sales ratio of 0.87.

The beauty of using this ratio in the case of Quindell is that gross sales are very hard to manipulate and the majority of the negative view points regarding the company seem to come from this (poor and unoriginal) direction.

It's worth pointing out that statistically firms with price to sales ratios below one tend to show strong future upwards share price growth.

5. Dividends:

I didn't really want to discuss dividends much because it won't be long before we're made aware of the company's plans regarding this, but considering that the last dividend (in post consolidation prices) was 1.5p, this gives a current dividend yield of 1.03% at the current share price, but when you consider how fast the company has grown and the fact that it will be taking £1,000,000 of cash per day in the fourth quarter of 2014, the dividend yield potential at these current prices could be massive.


To conclude, I think I simply have to conclude as I normally do, that Quindell remains staggeringly undervalued in this current price range and in ranges significantly above it's current price. It looks as if I'm just going to have to wait and add to my position where possible and allow the market to slowly wake up to what (in my humble opinion) is a company with huge further potential for both dividend and share price growth.



All the Best

The Masked AIM Trader.


Sources:

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