Quindell plc – to a dark place or back into the light after response to Gotham City’s critique?
Quindell plc (QPP) has published its “detailed response” to the critique earlier in the week by Gotham City Research LLC, including re-emphasising that it rejects the assertions raised in the Gotham publication and that it considers the note to be “highly defamatory” and “deliberately misrepresentative”. Hmmmmm.
The company added that “legal action has already been initiated by the company against those responsible for this coordinated shorting attack and reports are also being made on their activity to the appropriate regulators” (though this also seems to include those not part of any ‘coordinated shorting attack’ – see HERE). With its response, does Quindell remain in a dark place or has it moved back into the light? The following reviews.
The company argues that it “is outperforming its competitors and delivering a far higher EBITDA percentage margin than its peers… due to the scale of its business, the bias within its outsourcing to legal services and health services and the contribution from its technology Solutions division”. It argues that Gotham “fails to take account of significant group led synergistic and organic growth on top of acquired entities”, with approaching £1 billion per annum of contracts won in the last 18 months (excluding revenue from a joint venture announced with RAC).
On the issue of cash generation, Quindell particularly notes that;
“Over 60% of legal services cases follow the Ministry of Justice portal processes. These are the simplest cases, are uncontested from an admission of liability perspective. Even so, due to the time it takes to properly assess each case, allow for the extent of injury to be properly determined and to conclude, the insurance industry settles these cases in between five and six months. At this point, the case is billed. Accordingly, as with other professional services firms, almost all the group’s legal services revenues earned in the prior six months remain in accrued income until billed, whereupon they are typically settled by the at-fault insurer promptly within 15-30 days”.
It emphasises that resultantly the delivery of strong growth has required investment in working capital, but that “this investment unwinds in subsequent periods as evidenced by cash collections during 2013 of over £270 million, circa 185% of the value of total trade related receivables for the Group as at 31 December 2012”. Indeed, if the company is to meet an “objective” that post a £200 million fundraising in November “it should not need to raise any more capital to support its expectations of organic growth within the Services division in 2014 and beyond”, it needs to demonstrate its ability to collect on what has still been a rapidly increasing amount of receivables. Despite considering that in terms of cash generation it has already been able to “prove the sceptics wrong”, I would argue that the company’s track record (as shown in my tables HERE) suggests it is still to sufficiently demonstrate an ability to successfully manage debtor amounts and collect cash.
In relation to what the company founder and Chairman, Rob Terry’s, personal investment into the company was used for, the company notes “a combination of technology development, office and infrastructure purchase and for leisure assets which were all subsequently sold to fund the core technology and outsourcing business”. There is also a somewhat pathetic emphasis given his remuneration now (a £402k salary and £488k cash bonus for 2012) on “plus over 10 years of sweat equity” and that “for many of those years Rob’s services were being billed out as management services to other companies by Quindell, charging multiple hundreds of thousands of pounds per annum, without Rob taking any material compensation from Quindell for these services”.
Quindell does deserve credit for – unlike blinkx – immediately accepting that a detailed response was needed to a lengthy critique and it also states that “it is the intention of a number of the directors to purchase shares in Quindell once they receive clearance from the appropriate regulatory bodies” – hopefully for shareholders, again unlike blinkx, these will be for immediately meaningful amounts.
However, I still remain cautious of a still currently circa £1.5 billion market capitalisation here. This is because, as noted above, I consider that the company still has to meaningfully prove its cash generation credentials but also due to some concerns about the industry in which much of the group operates. It described Gotham’s statement on an industry probe recently initiated by the Chairman of the Transport Select Committee as “exaggerated and misleading” but admits that “the industry in which the group operates will always constantly be under review as is highlighted by major insurance companies in their annual results and risk statements”. Although Quindell argues that it has previously been ahead of the market in this respect and that reviews and major changes typically take years, these are undoubtedly a threat which brings doubt to its guidance that its “margins are sustainable in the long term”. |
