Quindell doing the right thing

Quindell is confident of meeting its full-year targets, which includes revenue of between £750 million and £800 million after a strong third quarter. Crucially, there are no real negatives here, and the divisive legal outsourcing firm is doing all it can to win over the critics and drive a sustainable rerating.

Thanks to what Quindell called "strong organic and synergistic growth", revenue reached around £198 million in the three months to 30 September, more-than double last year's £92.1 million. Most of its earnings came from the Professional Services division - up 124% to £177 million - and less than 10% of group revenue is from businesses acquired in the last 12 months.

Continuing its strong headline figures, adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) leapt by 141% to £83 million with adjusted cash profit margin of 42% in line with guidance. Earnings per share (EPS) reached around 15p, and adjusted operating cash flow was "significantly ahead of expectations and guidance" at around £9.4 million.

Its expansion into Noise Induced Hearing Loss (NIHL) is ahead of plan, too, despite rejecting 91% of applications, with cases at higher-than-expected amounts. Quindell is conducting a review into settlement timings in the fourth quarter, and will say whether there will be any positive impact on 2015's first-half cash flows.

Chief executive Robert Terry said: "Taking in to consideration that volumes are subject to roll out, execution and industry claims frequencies, the board is confident that the upper end of market expectations can be achieved for the full year for 2014 on revenues of between £750 to £800 million by repeating the same run rate performance delivered by the business in the third quarter and taking into consideration seasonal fluctuations in the fourth quarter."

To ensure it reaches its increased cash profit margin guidance, Quindell will continue to drive down the cost of insurance claims. To keep control of its growth, the group will be selective with its business deals, making its cash flow more certain and helping it achieve its cash flow guidance of up to £40 million in the second half of this year and up to £100 million inflow.

Cenkos is still confident that Quindell will rerate back towards 500p, however, blaming the current valuations on market uncertainty, which they believe can unwind in the next few months.

The broker keeps its EPS forecast at 59.7p for 2014 and 96.6p for 2015, putting Quindell on a price/earnings multiple of 2.6 and 1.6 respectively. This is cheap, but the usual caveats apply, and Quindell must establish a track record of growth to restore confidence and overcome market suspicion around the firm's business model.

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