Quindell (LSE: QPP) issued a trading update this morning, but even the firm’s remaining diehard investors were not impressed, sending the insurance outsourcer’s stock down by 5% in the first hour of trading.
To be honest, I’m surprised the fall wasn’t worse.
In my view, today’s update is a transparent attempt to prepare investors for a major profit warning and cash crisis early in 2014, when the firm will be required to update markets on its fourth-quarter performance and full-year results.
We need a review
For me, alarm bells started ringing as soon as I saw that Quindell had engaged PwC to conduct an “independent review”.
Firms that are trading broadly in line with management’s expectations — as Quindell claims to be — don’t need independent reviews from expensive accountants.
Quindell says that the decision to appoint PwC was made “in conjunction and consultation with the Company’s bankers, advisers and auditors” and will include a review of Quindell’s “main accounting policies”.
The implication is obvious, in my opinion: Quindell’s accounting policies may prove to be inappropriate, or even misleading.
Vague
Today’s trading update was incredibly vague. The firm made no mention of the key performance indicators and targets which have been a feature of recent updates, except for a vague remark that “cash receipts [from legal services] are greater than in comparison to previous quarters”.
As recently as October, Quindell was targeting positive cash flow during the fourth quarter. There was no mention of this today, suggesting that this is unlikely to happen. This suspicion was confirmed, for me, by Quindell’s comment today that “growth in cash receipts has not been as significant as previously anticipated”.
How much cash?
Previous updates have included information about Quindell’s cash balance, but today’s update did not include this vital piece of information.
However, the firm’s statement “continued access to its three credit facilities” would be needed to deliver on current plans was alarming: the company is clearly now dependent on its banks’ goodwill to continue trading.
Other warning signs
If today’s statement wasn’t enough to qualify Quindell as an immediate sell, then other recent events should be.
Over the last few weeks, we’ve seen Quindell founder Rob Terry and finance director Laurence Moorse sell 17% of their combined shareholdings, plus unconfirmed reports suggesting that Quindell is increasingly slow to pay its suppliers, and may be losing business.
For me, there are far too many unanswered questions about Quindell, and I believe there are far better buys elsewhere in today’s market.
