Join our community of smart investors

Quindell presents a quandary

Quindell's shares have slumped again despite stellar first-half growth
August 21, 2014

Quindell (QPP) can’t seem to win over investors. Shares in the insurance-claims outsourcing specialist slumped 10 per cent on the day it announced its interim results, although it almost quadrupled its first-half operating profit to £154m and generated an operating cash inflow in July.

IC TIP: Hold at 192p

Quindell is often accused of putting the cart before the horse by booking large amounts of receivables before being paid for its services. For instance, its accrued income more than doubled since December to £309m, while its operating cash outflow expanded from about £12m to £53m in the half. That reflects the time-consuming nature of processing legal cases – an uncontested personal injury claim typically takes five months, says chairman Robert Terry, while more complex cases can last over a year.

Nevertheless, Quindell generated over £220m in cash last half - compared to £270m over the whole of 2013 - or roughly four-fifths of the value of its core receivables in December. And it expects second-half operating cash inflows of £30-40m, rising to £100m in the first half of 2015.

Quindell’s exponential growth stems from its key professional services division, which tripled its cash profits to £121m and widened its margin from 29 to 41 per cent. That reflected gains in its personal injury-focused legal services business, which has benefited from regulatory changes in the legal industry forcing over 1,000 UK law firms to close. Quindell has taken over their workload and now controls about a quarter of the market, with 110,000 cases in progress as of June 30. Its strategy centres on lowering the cost of insurance claims, while also improving the efficiency of processing them.

Quindell also dismissed claims it is overly reliant on acquisitions, stating that the businesses it has acquired in the past year contributed less than 10 per cent of its sales during the half. Moreover, shareholders pushed for its latest growth spurt, says Mr. Terry, who expects Quindell to be a “significant dividend stock” in time.

Broker Canaccord Genuity expects full-year pre-tax profits of £337m, giving EPS of 51.8p (from £134m and 37.7p in 2013).

QUINDELL (QPP)
ORD PRICE:192pMARKET VALUE:£ 838m
TOUCH:191-193p12-MONTH HIGH:683pLOW: 140p
DIVIDEND YIELD:0.1%PE RATIO:4
NET ASSET VALUE:208p*NET CASH:£18.9m

Half-year to 30 JunTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20131633911.8nil
201435715430.1nil
% change+119+292+155-

*Includes intangible assets of £487m, or 112p a share