How Much Is Quindell plc Really Worth?

In the last 52 weeks of trading, Quindell (LSE: QPP) stock has been valued below 10p and above 40p, and it currently trades at 21p. Its stock price is also highly volatile — it’s up almost 9% in the last five trading sessions.  But the real value of the insurance claims processor hinges on its asset base. 

Valuation & Balance Sheet

Quindell is essentially an outsourcing platform for the insurance claims market. It reported total assets of £881 million as of 31 December 2013.

Cash on hand and equivalents totalled £199.6 million, or 3.2p per share on a fully diluted basis. Receivables stood at £314.9m. Assuming 100% of short-term credits will be successfully collected, which is a pretty generous assumption, receivables are valued at about 5.1p per share.

The valuation of goodwill and intangibles is, in most cases, highly problematic.

Assuming a 50% discount is applied to these items, the book value of Quindell’s goodwill and other intangibles comes in at 2.3p per share.

Inventory, pre-paid expenses and property, plant and equipment have a combined book value of about £28m, or 0.5p per share. Long-term investments, meanwhile, are worth less than 1p per share.

So, according to this approach, Quindell stock would be fairly priced at 12p, which implies a 40%-plus discount to its current market value.

Even if no discount is applied to the value of goodwill and intangibles, resulting in another 2.3p being added back, that only gives a fair value of 13.8p,  so there’d still be a discount of about 30%.

Investors who abide by value won’t be bothered to look beyond the company’s current assets base, however. Then, Quindell’s fair price drops to 8.3p per share. In this scenario, the Quindell stock is currently overvalued by 60%.

Elsewhere: Receivables And Operating Cash Flow

Other figures also deserve attention. The cash flow statement signals a massive change in account receivables in 2013, which have grown by about £137m year-on-year. The speed at which they are collected is getting better, but they should be closely monitored. Positive working capital (+£330m) means that Quindell can’t self-finance its operations.

The company says:

“in terms of the assessing the group’s resilience, whilst it has no need to, ultimately if required the group can choose to adjust its capital structure by varying the scale and mix of its trading activities to reduce any requirement to fund working capital. It can also seek to liquidate receivables at a faster rate than normal if it chose to through payment protocols and additional block settlements of debt, although there would likely be a cost in the form of a discount to this.”

Debt Maturity: during 2013, the company successfully renewed and extended two of its core banking facilities to April 2015, and extended its third to December 2015, Quindell said.

Liquidity risk is real, operating cash flow is negative and the maturity profile of its debt obligations isn’t exactly reassuring. Very little visibility on its trailing performance doesn’t provide a helping hand, either.

What About An Upbeat View?

A bullish stance on Quindell would be based on the profit and loss statement of the company. Not only is Quindell growing revenue by acquiring other assets, but it also boats hefty operating margins and its net leverage ratio is in good order.

Yet value is something else.

(I have refrained from debating the merits of recent analysis published by Gotham City Research, which had a big impact on the stock price of Quindell earlier this year. Gotham claimed that Quindell stock is worth less than 3p, based on several issues it claimed to have found, including the methodology applied to the reconciliation of profits per unit and corporate governance.)