Small Cap Report (13 May) - QPP, ZYT, JLF, BQE, JPR, TET

13th May '13 by Paul Scott

8 comments 17194 reads

Pre 8 a.m. comments

Another clarification statement has been issued by Quindell Portfolio (LON:QPP) this morning. As usual, one has to pick through it to try to untangle the truth. They still haven't properly explained what the "equity swap" arrangements late last year actually were, but reassure that they won't result in any further equity being issued, or cash leaving the business. What they fail to state of course, is that if the share price remains depressed then there might well be a significant write-down of the £13.3m receivable related to this Placing.

I also note that the RNS about the Placing from 3 Dec 2012 gave no information whatsoever about the equity swap, and mis-represented it as a straightforward £17.0m fund-raising at 17.5p, when it clearly was actually some kind of equity drawdown facility where the final amounts received by the company will be dependent on the future share price - which explains why management have been more interested in talking up the share price, rather than talking about the business.

The company also tries to reassure on debtors, saying that in four months they have collected in half the year-end debtors. So looking at it simplistically, if debtors are running at 8 months then applying that onto £443m forecast turnover for this year, it suggests that debtors will have risen by another £91m to £295m by 31 Dec 2013.

Thinking back to Accident Exchange, the problem with debtors was that they had a large & very long tail. So whilst they collected in some of the debtors fine, there was an ever growing rump of claims that they couldn't collect in, which just built & built until it brought the business down.

So they were forced into block settlements at a discount. Quindell also refer to block settlements, but state they are collected with no "net discount". What does "net" mean in this context? You cannot increase some claims to net off againt discounts given on others, can you? So you either give a discount, or you don't.

They also state that (as you would expect) management intend buying shares in the company when they can, I presume they must be in a closed period at the moment.

This statement may well give bulls some breathing space today, so I would expect to see the shares rally.…

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bobdouglas

13th May '13

ref. Bioquell - noted on 25th April chief executive and group finance director/chief operating officer were awarded 194000 and 165000 share options with an exercise price of 146.5 pence. In order for the options to vest Bioquell has to report earnings per share growth of RPI plus 7.5% per annum for three years.

Mark Carter

"They still haven't properly explained what the "equity swap" arrangements late last year actually were"

Somebody draw me a picture, because, like you, I'm still unclear about the mechanics of it. Also, I think they're being rather coy with the use of the word "counterparty". What is the general nature of the counterparty? A hedge fund, investment bank, a related-party transaction, something different entriely, what?

In their conclusion, they stated that they have "sufficient funding and no reliance on receiving any further cash from the equity swap to be able to fund its growth to meet market expectations in 2013 and beyond." My impression is that this is a carefully crafted sentence where, like the Red Queen in Alice in Through the Looking Glass, the words mean exactly what they want them to mean. "Growth" could be referring to either organic or acquired growth. The market is rather twitchy about the rate of acquisitions at the moment, so one way to interpret the statement is that growth by acquisition is still very much on the cards. Secondly, I think the company is being disingenuous about future growth being unreliant on further cash from the equity swap. I don't think anyone was suggesting that in the first place - it's the overall growth strategy and general methods of financing the deals that are causing concerns.

Ramridge

Hi Paul
". So I'll definitely be looking at companies where a good proportion of revenues are recurring in future I think."
Which sector satisfies the following criteria? 1. Take money up front from customers average £2000 p.a. And don't pay out benefits until many years later, 2. Resilient even in recession and crisis times, 3. Eye watering fat margins and profits. 4. Volume business with huge cashflows ? Well of course life insurance. Consider this: during the financial crisis in 2008/ 2009 while banks were going to the wall almost every day, only one major life insurer *in the whole world* went belly-up.
I have over the years made very satisfactory profits from this sector and continue to hold them in my SIPP.
Regards, Ram

Marky

14th May '13

Hi Paul,

In case you are indeed keeping an open mind on Quindell, I'd point out that - in terms of your simplistic assumption on debtors - if half have been paid within 4 months and half will be paid in the next 4 months, then that's an average of 6 months, which Rob Terry confirmed on Twitter.

Going forward, we know that the RAC deal (one of the larger ones announced) does not follow the pattern of long debtor days, but is cash positive. I suspect Quindell has pushed for this arrangement with others, and that this 6 months will reduce steadily over 2013.

"Thinking back to Accident Exchange, the problem with debtors was that they had a large & very long tail. So whilst they collected in some of the debtors fine, there was an ever growing rump of claims that they couldn't collect in, which just built & built until it brought the business down." The key difference in my view is that Quindell are offering a service which their customers have been absolutely desperate to get hold of - it saves them money, gives better customer retention and crucially, ticks the regulatory boxes.....certainly worth altering their historic payment policies for!

Marky.

cadmunkey

Zytronic holder here but thankfully only a small position. I was a bit shocked at the profit warning but also the very quick sell off of the shares. You live and learn! I dont have that many small caps in my portfolio so thankfully I'm pretty well diversified.

Paul Scott

Hi Marky,

I think with Quindell Portfolio (LON:QPP) that I'd want to see at least another year of accounts, to see if the Debtor position really does settle at a reasonable level of 6 months as you suggest, and without the figures being skewed by acquisitions.

Do we have any third party (i.e. from insurance companies themselves) validation of QPP's claims about their services being in such high demand? It strikes me that the hype & the reality with QPP are poles apart - they talk about £500m turnover from the RAC, but so far it's only been a £4m trial. And the £500m relates to total claims value, not what QPP would receive.

They misled the market about their fund-raising in Dec 2012, so I just feel management are fundamentally untrustworthy, so all their claims should be treated with great scepticism.

But if they really do have a business with sustainable high levels of profits, then the shares are cheap. At the moment though that seems a leap of faith!

Cheers, Paul.

intuitive6191

There is a broadly positive report on Interactive Investor about Quindell
http://www.iii.co.uk/articles/92434/should-i-buy-shares-quindell-portfolio

I personally have some reservations about the integration of all their acquisitions. In my view it will be difficult to get all these operations working together efficiently in the necessary timescale.

Paul,

"It strikes me that the hype & the reality with QPP are poles apart - they talk about £500m turnover from the RAC, but so far it's only been a £4m trial. And the £500m relates to total claims value, not what QPP would receive." Seriously? Here are the relevant bits from the RNS, they relate 2 totally distinct services.

The RAC outsourcing agreement:
Quindell has agreed to enter into a 5 year contract with RAC for a combination of Quindell's market leading software, consultancy and technology enabled outsourcing services. This contract, which is significant from day one,has the potential to be the largest contract that the Group has entered into to date as revenues grow during 2013 and beyond.

The RAC technology agreement:
The initial phase of the technology element of the RAC agreement is valued at circa £4 million and the majority of these revenues will be earned before the end of 2013, with subsequent phases being discussed for the implementation of the technology into other areas of the business. RAC are also working with Quindell to support other jointly planned initiatives including some areas of RAC's recently announced telematics based initiatives.

Paul, your entire analysis of QPP appears to be on the basis of (deliberate?) misunderstandings and insufficient research.

Marky

Small Cap Report (13 May) - QPP, ZYT, JLF, BQE, JPR, TET

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Paul Scott

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