In a move that caught investors by surprise, Quindell (LSE: QPP) shares were suspended from trading on Wednesday.
The explanation turned out to be as bizarre and inexplicable as many other aspects of the Quindell saga: when the firm announced the sale of its professional services division to Slater and Gordon Limited (SGH) on Monday, Quindell somehow forgot to mention that two units from its other division, Digital Solutions, were also included in the deal.
This remarkable oversight had quite a big impact, as the profits associated with the units being sold rose sharply, effectively reducing the valuation multiple being paid by SGH:
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|
Quindell profits |
Original SGH sale announcement (30 March) |
Amended announcement (1 April) |
% difference |
|
2013 pre-tax profits |
£82.5m |
£96m |
+16% |
|
H1 2014 pre-tax profits |
£113.4m |
£130.7m |
+15% |
Of course, these profits will still be written down by PwC’s review of Quindell’s accounts: as an indicator of what to expect, Slater & Gordon’s in-house estimate of Quindell’s 2014 gross profits is £99m, compared to Quindell’s own internal figure of £328m.
However, this is largely academic for Quindell shareholders, now that the SGH deal has been agreed.
What shareholders do need to understand from yesterday’s announcement is that Quindell has sold virtually the entire business to SGH, not just the professional services division.
A hidden bargain?
There was some good news yesterday. Pre-tax profits from the remainder of Quindell’s Digital Solutions division were £6.8m in 2013 and £8.5m during the first half of 2014.
This is a big increase, and also suggests that if these profits are sustainable, Quindell shares may now be quite attractively valued.
Here’s why: Quindell shares currently trade at around 130p. When the SGH deal completes, Quindell plans to return £500m in cash, or 113p per share, to shareholders.
Quindell’s remaining business is therefore valued at around 17p per share. A back-of-the-envelope calculation suggests that first half pre-tax profits of £8.5m could translate into full-year earnings per share of around 3p, giving a possible P/E rating as low as 5.6!
Of course, this optimistic outlook is by no means certain: we haven’t yet seen Quindell’s 2014 accounts, and the firm doesn’t seem to be planning to publish a complete set of financial statements until after the SGH deal has been approved by shareholders.
Is Quindell a buy?
I won’t be rushing out to buy Quindell shares, as I’d rather see a little more evidence of the value of the firm’s remaining business units before stumping up any of my own cash.
However, my cautious approach could mean that I miss out on possible gains.
