It is rare for a company’s shares to trade at a discount to the cash on the balance sheet, but Quindell (LSE: QPP) and Monitise (LSE: MONI) are both currently in this position.
Do these two companies represent great value for investors today?
Quindell
Quindell sold most of its assets to Australian law firm Slater & Gordon earlier this year for £637m. From that sum Quindell settled outstanding bank debt of £36m, set aside £50m for developing its retained businesses and general corporate purposes, and put £50m into an escrow account to cover warranties given to Slater & Gordon. That leaves a cash pile of £500m.
It’s the current intention of Quindell’s board to return up to £500m to shareholders by November. Given Quindell’s total of 483m issued and to-be-issued shares, that gives 103.5p per share. A release of the full £50m from escrow (in November 2016) would give 10.35p a share, and Quindell reckons it will get a further £40m or so over the next two years from hearing-loss claims that have still to settle, representing 8.28p a share.
So, there’s a total of 122p a share as a potential cash return to shareholders. Then there’s the retained businesses. If we say they are worth just the £50m the company has set aside for developing them, we get a further 10.35p, so, a total value of over 132p a share. Quindell’s shares are currently trading at just 99p.
However, there are uncertainties — not only about the value of the retained businesses, which are currently loss-making, but also about the cash returns. In particular, and most immediately, the proposed £500m isn’t in the bag. A Serious Fraud Office investigation is in progress as a result of past accounting practices and statements by Quindell, and there is also a class action being put together on behalf of investors seeking compensation from the company for their losses.
A court decision is required on whether Quindell can reorganise its capital to enable it to make the return of cash to shareholders. The court decision and contingent liabilities relating to potential fines and legal claims make the quantum and timing of any return of cash uncertain. As such, I’m afraid an investment in Quindell, even at the current discount to cash, would be something of a shot in the dark.
Monitise
Monitise’s shares have collapsed from over 80p in early 2014 to just 2.75p, as I write. The company is now valued at £60m, but annual results released earlier this month showed net cash of over £88m (4p a share) on the balance sheet at the company’s financial year end of 30 June.
Unfortunately, this mobile money business continues to be loss-making, and has burned through cash at an alarming rate over the last 12 months, with a £60m outflow from operating activities. However, Monitise has been drastically reducing headcount and other costs, so that the operating cash-burn reduced from £42m in the first half of the year to £18m in the second half.
Monitise still reckons the strength of its balance sheet will see it through to break-even and beyond, and expects to have cash in excess of £45m (2p a share) throughout the current year to June 2016, as it moves towards profitability.
I was bearish on Monitise for a long time, but when the shares got as low as 5p in August (market cap £110m), I thought they could be a speculative buy, because there had been interest from trade buyers earlier this year — knocked back by Monitise — when the market cap was in excess of £220m.
A bid is still possible, but Monitise’s future as a standalone business looks more uncertain than ever, with the chief executive having announced she is abandoning ship. The shares may be at a discount to the £88m cash at the last balance sheet date, but they are at a premium to the nearer £45m cash going forward. As such, if Monitise has any attraction at all, it isn’t in the shape of a discount to cash.
