On the face of it, there was a lot to like in this morning’s interim results from Quindell (LSE: QPP).
Sales up 118% to £364.2m.
Pre-tax profits up 292% to £153.7m.
Cash generation of £220m.
To top it all off, Quindell’s share trade on a crazily low 2014 forecast P/E of just 3.5!
So why did Quindell’s share price fall steadily when the markets opened?
Profitable claims
Let’s start with a closer look at Quindell’s profits. During the first half of this year, Quindell reported adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) of £156m.
Of this, £101m (65%) came from Quindell’s Legal Services division, which handles compensation claims, while a further £14.2m (9.1%) came from its Health Services operations, most of which are linked to the personal injury claims handled by Quindell’s legal services division.
In other words, 74% of Quindell’s profits were derived from compensation claims during the first half of this year, making it clear that this is currently Quindell’s main line of business. This is a cause for concern for some investors, who question its sustainability.
Telematics profits
The remainder of the firm’s profits came from its Digital Services division, which includes the firm’s motor insurance telematics business, where EBITDA rose by 250% compared to the same period last year.
However, Quindell didn’t address recent concerns about its large telematics deal with the RAC, instead simply stating that ‘certain contracts are being restructured’ — another warning flag.
What about cash generation?
Quindell has been criticised for its lack of cash generation in the past, and seems to be working hard to fix this.
Cash generation during the first half was £220m, which the firm says represents 80% of receivables at the end of 2013, excluding noise-induced hearing loss cases, which are a new growth area this year.
However, despite improved cash generation, the influx of new business seen during the first half means that Quindell’s receivables rose to £560m at the end of June, up by 71% from £327m at the end of 2013.
Quindell said today that it ‘has never written down any significant amount of receivables’, but such a large increase may raise concerns that not all of this money will be recoverable.
Should you buy it?
The problem for Quindell is that the market just isn’t buying the firm’s story, despite the apparent progress signalled in today’s results.
Going against such a distressed valuation takes a strong nerve.