Quindell update impacts City view

Controversial outsourcing firm Quindell is guaranteed to generate lots of chatter within the financial community, and its third-quarter numbers are no different.

It's on track to hit full-year forecasts and profit has grown fast. Revenue guidance is down to £750-£800 million from £800-£900 million, but cash profit margin should now be 40-45% versus 35-45% last time. It's also discussing its options, which includes share buy backs, a North American listing, sale or demerger of assets or divisions and investment from third parties.

This is also the time that fans in the City jump to Quindell's defence. And joint house broker Canaccord Genuity reckons Noise Induced Hearing Loss (NIHL) could be big business:

We believe NIHL claims accruals and settlement times are a key topic of debate. NIHL cases in progress now total c.44,500. Notably, Quindell accrues revenues at c.£7,200 legal fees, a 31% discount to ABI industry average (£10,500). We understand that the first few settlements already agreed in the third quarter are at the ABI industry average. Critically, Quindell states that its vetting process and provisions lead to an overall repudiation rate of c.91% of NIHL cases. Quindell plans to provide an update on NIHL settlement timings and the potential positive impact on half-year 2015 operating cash flows (current guidance c.£100 million) by the pre-close statement.

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Quindell's legal division remains promising, too, reckons the broker:

In the meantime, it is worth examining the revenues and profits generated by QLS (Quindell Legal Services) if it reverted to taking on claims settled within the Ministry of Justice (MoJ) claims portal i.e. road traffic accident claims. On the assumption of 15,000 claims a month (current QLS capacity) and average revenue per claim of c.£1,500, MoJ portal work could generate annual revenues of £270 million. If we assume an EBITDA margin of 25% (discount to QLS margins of 56% in half year 2014), MoJ portal work can generate an EBITDA of £67.5 million. Crucially, MoJ portal work has a well-documented six-month cash settlement time. Putting this on 11x EV/EBITDA (in line with Slater & Gordon) would value this profit stream at c.£740 million. This is c.10% higher than the current market cap.

And the company remains undervalued, according to Canaccord:

We lower our full-year 2014 revenue by 4% to bring it in line with the new revenue guidance. Our full-year 2014 EBITDA is broadly unchanged as we increase margins from 40.6% to 42.3%, in line with new margin range guidance of 40% ~ 45%. We maintain our 'buy' recommendation and adjusted Quest fair value of 362p.

The next trading update is scheduled either for late December or early January, but it will be surprising if we don't hear something (for whatever reason) before then. Quindell actually suggests that an internal review into NIHL settlement timings and the potential positive impact to first half 2015 cash flows could precede the fourth-quarter update. A few more quarters of profit growth and improving cash flows may begin to win the City round.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.