Shares in Quindell (LSE: QPP) are down 6% at the time of writing after the company released a trading update. There were two main takeaways from the release, with the first being that cash flow from operations from the Professional Services division continues to grow. In fact, cash receipts in the division are greater than in comparison to previous quarters, which is great news for investors, although of slight concern is that their growth in the final quarter of the year has not been as significant as previously anticipated.
The second takeaway is that Quindell has appointed PwC to conduct an independent review of the business. This follows the significant changes that have taken place at Quindell in recent months, with the Chairman and CFO announcing their departures, as well as the internal business review on Noise Induced Hearing Loss. The review will focus on Quindell’s main accounting policies and forecasts for cash generation in 2015, which is an area that has been questioned by various investors throughout the course of 2014.
Uncertainty
Clearly, the undertaking of an independent review of the business is likely to cause a significant amount of uncertainty among investors in Quindell. That’s because the review could find problems with Quindell’s accounting procedures that are not yet known about but, similarly, it could give the company a clean bill of health and allow it to progress without coming under constant attack regarding its forecasting and guidance.
In the meantime, though, the combination of an independent review and the fact that cash receipts from the Professional Services division were behind forecasts in the final quarter of the year are likely to cause weakness in Quindell’s share price in the short run. That’s despite cash receipts for the year being higher than in the previous year and the board stating that its resources appear to be sufficient to deliver on management’s current plans, both of which are clearly encouraging for shareholders.
Looking Ahead
A great deal of importance is set to be placed on the independent review by PwC and, as such, Quindell’s medium-term share price performance is likely to be closely linked to the outcome of the report. That’s simply because there have been so many doubts regarding its accounting policies in recent months and such a considerable amount of speculation that the most important question in investors’ minds is with regard to the company’s cash flow.
So, while Quindell’s trading update does give grounds for optimism, its share price is likely to remain weak in the short run while the review is being completed. That’s also the case because of its slightly disappointing recent cash flow performance. Over the medium term, though, the outcome of the report looks set to be the major catalyst with regard to Quindell’s share price and, as a result, potential investors may wish to wait for its outcome before buying a slice of the company.