Quindell’s (LSE: QPP) preliminary trading update for the first half of 2014 was pretty impressive. Quindell stock, however, is still trading just above liquidation value despite a surge of about 30% on Monday.
The shares rose by more than 5% to 247p on Tuesday in early trading, but they pulled back to 234p soon after. Quindell is a very risky investment at this economic juncture. As such, investors looking for risk-off trades should not bother.
H1 Trading Update
The insurance claims processor is an opportunity too good to pass up at this price, the bulls argue. Any investment in Quindell below 325p a share is a bargain, they insist.
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The company’s latest trading update shows that Quindell is healthy and is growing at a record pace. There is lots to like in it, true.
Liquidation Value
Quindell stock closed at about 235p on Monday. The shares rose by about 30% in the wake of upbeat revenues and operating profit for the first half of the year — yet at this level, the shares trade only 15% above Quindell’s liquidation value.
What’s wrong with it?
(Interim results for the six months to 30 June 2014 will be announced on 21 August 2014.)
Impressive Growth
Revenue rose to around £355m for the six months ended June 30, driven by stellar growth in Quindell’s “solutions” division. Meanwhile, the group’s adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) was up a mighty 187% to £155m.
Moreover, Quindell’s EBITDA margin surged more than 10 percentage points to 43% compared to the same period in 2013. This is important, too, because the operating cash flow profile of Quindell has been a drag on its stock performance so far. Equally important, guidance for revenue of up to £900m was confirmed — which suggests a steeper growth rate to the end of the year.
At around 235p, Quindell stock is valued at a 90% premium to the book value of its current assets and at a 22% premium to the value of its total assets. The company must improve its liquidity profile for a few quarters to become truly investable, in my view, but a bet in region of 200p/240p would make a lot of sense.
Cash Flow Under The Spotlight
“Adjusted operating cash flow for the half year ahead of expectations and guidance with circa £51 million outflow compared to original guidance of £60 million outflow during planned significant growth in H1,” Quindell said.
This is the most problematic part of business. Management have yet to prove they can deliver: receivables must go down, and free cash flow must rise, although there are encouraging signs that Quindell’s cash conversion cycle is slowly improving.
Quindell secured funding in 2013, but refinancing risk also remains a real concern.
Volatility
“Investors haven’t seen this much volatility in US stocks since April, and options traders are betting there’s more to come. The Chicago Board Options Exchange Volatility Index jumped 17 percent to 12.08 last week and a similar measure for European equities surged the most in almost six months,” Bloomberg reported on Monday.
“The ratio of contracts wagering that the volatility measure known as the VIX will rise versus those betting on declines is almost 4-to-1, the highest level since before the financial crisis in 2007, according to data compiled by Bloomberg.”
So, volatility may turn out to be the biggest headache for Quindell investors.
Trading has been particularly volatile in recent days, so Quindell is a reasonable play only for investors willing to embrace risk or for those seeking riskier equity investments to be included in a diversified portfolio.
