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Gotham City strike no joke for Quindell


So who is Gotham City? A caped crusader here to rescue investors from unscrupulous big city crooks, or a villainous front-runner, making a quick buck from shorting shares and then issuing scaremongering research reports on vulnerable companies? Gotham City’s website says it focuses on due-diligence based, special situation investing and it may be long or short of the companies it covers. We would guess, from the very limited disclusres it makes, that it’s short of Quindell. Past targets in recent months have included Nasdaq-listed Blucora, Tile Shop and Ebix. But this appears to be its first strike on a UK-listed company.

So why Quindell? Well Quindell is the kind of high growth stock that sets discussion boards alight. It also has a strong retail investor following (the kind of sellers that you need in a panic-induced shorting move as institutional holders tend to be harder to shift), and liquid shares. Quindell is mooting a North American listing, which may have caught the attention of shorters across the pond. And it has always had its sceptics, partly due to its penchant for share placings and rapid-fire acquisitions, and partly due to the fact that founder and executive chairman Rob Terry’s previous venture The Innovation Group was a dotcom boom casualty.

For legal reasons, we cannot repeat any of the claims that Gotham City made here. But we can, using Quindell’s published reports, provide some commentary on Quindell as a business. In its last financial year, Quindell reported a 164 per cent increase in adjusted EBITDA to £138m, which implies an EBITDA margin of 36 per cent. The cash flow statement shows a £148m net increase in cash, which comprised a £216m inflow from financing activities (£200m of which was from the issue of share capital), an admittedly minuscule £3m inflow from cash generated from operations, a £12m outflow on finance and tax costs and a £59m outflow on investing activities such as acquisitions.

Quindell said that its auditors have reported on the 2012 and 2013 accounts and that their reports were unqualified. The company’s auditor is KPMG, who was appointed in October to help Quindell prepare for a full listing. Prior to that, Quindell used the services of Baker Tilly. This was the same auditor that Quindell had when it joined Aim in 2011 although at that time it was known as RSM Tenon.

From the above, publicly known, information, we would draw the conclusion that Quindell is growing rapidly, has high margins versus other companies we cover, had a relatively low level of profit-to-cash conversion last year (which is not unusual at a time of high growth) and a normal relationship with its auditors.

If Gotham City did front-run a short, then the unwinding of that should ease the pressure on the share price. Indeed the shares have already recovered a large chunk of the lost ground and at 26p are still up 68 per cent from when we turned buyers in October at 15.5p.

But the bad news for Quindell and its FTSE 100 ambitions is that when these kind of accusations are made, it takes time to restore confidence. The share prices of those companies targeted by Gotham City in recent months have not yet managed to get back to where they were before the attack (for Quindell that was 39p).

Mr Terry said when Quindell reported its recent full year results that 2013 was the year that provided the “proof” that Quindell was a high-quality business. Now it feels as if it has to prove itself all over again.

* Quindell has now issued its detailed response - see Quindell fights back