Quindell: Strong EPS Growth, Cash Inflows Commence

Quindell has continued to deliver strong growth with its H1’14 and Q3’14 updates showing significant y-o-y revenue, adj. EBITDA and adj. EPS growth, and the latter delivering an operating cash inflow of £9.2m. Operating cash flow of £30m-£40m is expected in H2’14 and up to £100m in H1’15. Indeed, the group is actually turning away business to allow cash flow to catch up. Quindell has also sought to simplify its business structure in order to explain in a more digestible manner what it does and how it operates. As such, we have given an overview of how we feel it is now positioned to benefit from its market position. While noting the risks, our stance is Buy.

Rapid Growth Continues

Quindell’s revenues have increased considerably y-o-y in H1’14 and Q3’14, primarily due to significant organic growth within the Professional Services division. However, we note that Quindell refrains from giving specific revenue guidance as its claims handling operation actually works to drive down revenue while maintaining or improving profitability as it drives down the cost of claims (we discuss this later in this report). We therefore find it encouraging that Quindell has delivered adj. EPS of c.45p in the first three quarters of FY’14 versus c.38p in the entire FY’13. Long term EBITDA guidance has been upgraded to 40%-45%.

Material Operating Cash Inflows Expected

Quindell delivered operating cash flow £9.2m in Q3’14 and is expected to deliver c.£30m-£40m in H2’14 and up to £100m in H1’15, excluding significant NIHL case inflows. The group has agreed the settlement of some NIHL cases in Q3’14 which falls well within its guidance case settlement time of c.18 months. As such, we feel there could be further upside to cash flow in the near term if these cases begin to settle in material numbers.

Valuation

We have valued Quindell using a DCF model running to 2024. This assumes that Quindell’s growth steadily matures while the adjusted EBITDA margin remains within the 40%-45% range. This suggests value of 655p per share.

The Cash Is Key

We feel the key is now to demonstrate that it can convert its rapid revenue growth into cash on a large scale. We believe the operating cash flow delivered in Q3’14 is encouraging as is the agreed settlement of some NIHL cases within one year and material inflows are expected in Q4’14 and H1’15. The shares appear materially undervalued relative to our DCF model, and as such, while we note the risks to the investment case such as successful cash conversion, our stance is Buy.