Quindell trading update appears to answer critics

Insurance services group, Quindell (QPP), seems to have put the shorters including Gotham City on the back foot this morning with the shares rising as much as 25% as it reassured investors with a trading update. The shares were trading at 222p after falling below 180p last week as Gotham City Research’s other target, Gowex, filed for bankruptcy in Spain worrying Quindell investors that perhaps the allegations against it had some basis of truth. The Quindell management team have issued some strong numbers this morning to counter Gotham’s criticism of its business model.

It announced a 117% year-on-year increase in overall revenues to £355 million in the six months to June 30th 2014, with “strong organic and synergistic growth” with businesses acquired in the past 12 months accounted for “less than 10 per cent of revenue”.

Quindell’s solutions division, which provides insurance sales and claims management software, had a revenue rise of 176% to £62 million. Services revenue, which includes its legal services division, doubled to £293 million in the period. Adjusted profit before tax rose to £154 million.

The highlights were:

– Revenue of circa £355 million up 117% (H1 2013: £163.3 m) due primarily to strong organic and synergistic growth; businesses acquired in the last 12 months represented less than 10% of revenue

– Adjusted EBITDA of circa £155 million up 187% (H1 2013: £54.0 m) due to H1 2014 mix having an increased proportion of Solutions revenue and growth of Legal Services revenue

– Adjusted EBITDA margin of circa 43% up over 10 percentage points (H1 2013: 32.3%)

– Adjusted Profit Before Tax of circa £154 million up 193% (H1 2013: £52.5 m)

– Adjusted EPS of circa 30 pence up 82% (H1 2013: 16.5 pence)

– Basic EPS, EBITDA and Profit Before Tax are all expected to be ahead of their respective adjusted numbers

Quindell said it is confident of meeting all its key performance indicators for full year market expectations (cash conversion, adjusted EBITDA and adjusted EPS) on full year revenue guidance of £800-900 million. EBITDA margin guidance increased from 35 to 40%. One of the key statements was that with the cash resources available there is no need to raise further funds to support market expectations in 2014 and beyond.

Gross cash reserves fell from £200 million at the beginning of 2014 to £84 million at the end of June. Net of debt, the company has around £24 million in cash, down from £140 million at the end of 2013.

Trading at around three times earnings, Quindell shares could go a lot higher if the numbers keep coming in and the basic mistrust from many city investors disappears. Are the numbers to be believed? Who knows, but the risk seems to have been reduced quite a bit this morning. Cash flow will be key in the second half of 2014 withe company’s cash cushion depleted in the first half in order to meet the expectation that further fund raising will not be needed.

Contrarian Investor UK

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