Small Cap Report (9 May) - QPP, PTCM, MCB, FFY

Thursday, May 09 2013 by

Pre 8 a.m. comments

The plot thickens at Quindell Portfolio (LON:QPP). Regulars will know that I've been sceptical about this company for some time, and it looks like my instincts are correct, in that a number of issues have emerged which should give shareholders considerable cause for concern. I am not a shareholder, nor do I have a short position in it either. So my interest is purely in understanding the facts, and communicating them to readers here.

Recently published accounts from Quindell showed Debtors ballooning to over £200m. This is on an annualised turnover run-rate of "more than £300m", so that's clearly a worryingly high level of debtors. Bear in mind that both Accident Exchange and Helphire unravelled because they published huge profits for several years, whilst debtors rose & rose, until in the end the whole thing collapsed because they could not collect in those debtors. So given that Quindell operates in the same space (although arguably has a different business model), ballooning debtors is bound to cause concern.

However, a number of other items in the accounts caused me concern, and I sent a (sort of) open letter to Quindell's CEO yesterday, via Twitter (since that seems to be his main method of communicating with shareholders) and a post on advfn. Click here to read that post (no. 5628).

I've not had a reply from the company yet, but shortly afterwards some of my questions were answered through an article in today's Financial Times which is pretty alarming, and certainly calls into question the ethics of the way Quindell is run.

The £13.3m derivatives contract which I queried with the company turns out to be a swap contract which the company used to guarantee that a new investor who subscribed for £17m of new shares in a Placing would not suffer any losses! The Placing was used to finance one of their acquisitions. Now clearly that is wrong, because it is prejudicing the interests of other shareholders in order to provide an artificial share price guarantee to a new shareholder.

As the share price has dropped 40% in recent days, then that will have landed Quindell with a cost of several million. I think the shares are likely to tank again today, as it's becoming pretty obvious that the short sellers who are attacking the company…

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Watchstone Group plc offers technology solutions to the insurance, automotive and healthcare industries. Its segments include Hubio, Healthcare (pt Health and InnoCare), and ingenie. Hubio provides integrated solutions to help organizations in the insurance and automotive sectors to build customer engagement and enable usage-based personalization. Healthcare includes ptHealth, a national healthcare company that owns and operates physical rehabilitation clinics across Canada, and InnoCare, a clinic management software platform and call center and customer service operation based in Canada. Its ingenie is an insurance broker. Using telematics technology, ingenie gives its community feedback, advice and discounts to help young drivers improve their driving skills. more »

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8 Comments on this Article show/hide all

SevenPillars 9th May '13 1 of 8

Well, Quindell looks to be dropping like a stone today. The shorters, whether they are right or wrong have clearly made a packet on the fears that something is not right about the company. The point is that unless there is a genuine immediate scandal of some sort going on then shareholders in this company who believe that the business model is sound are going to have to sit it out. The bad news currently around the company is likely to lead to more panic selling so a rot sets in. The company really does need to step up and say something when this happens as silence is often seen as guilt. I'd expect an official company announcement of some sort today. If I was a shareholder I'd be disappointed if that didn't happen.

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Paul Scott 9th May '13 2 of 8

In reply to post #73120

Hi SevenPillars,

Don't blame the shorters! They do their homework & latch onto companies where something's wrong. It might be a question of sitting it out if you believe in the business model, but I think the issue of the Derivative taken out to guarantee the losses of the £17m Placee is very serious. It could lead to legal action from other shareholders who also took part in Placings & were not guaranteed.
The CEO's position looks untenable to me now this information has come out, which involves the risk of a new CEO kitchen-sinking the accounts & blaming everything nasty he finds on the outgoing CEO. I wouldn't be at all surprised if more nasties come out of the woodwork here - after all if they've done dodgy deals to get a Placing away, then they're not likely to have been squeaky clean on everything else, are they? Just in my opinion.

Regards, Paul.

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SevenPillars 9th May '13 3 of 8

In reply to post #73121


I'm not blaming the shorters. I did say whether they were right or wrong remains to be seen, but in situations like this a panic sets in which is to their benefit. This panic may well be justified if all the bad news is correct and part of the problem here is the silence of the company itself.

The company needs to step up and answer the questions raised.

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johnrosier 9th May '13 4 of 8

Well done Paul. Good article on QPP and thank you for helping me come to my decision to sell my remaining shares yesterday. Looked like a good concept when I bought in the first half of last year but the Company was just in too much of a hurry. Should have followed my instincts and sold all my holding in January after attending a presentation in which Rob Terry spent most of the time talking about the share price rather than the business!

Website: JohnsInvestmentChronicle
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dangersimpson 9th May '13 5 of 8

Highly acquisitive companies that use their own shares to do deals to generate eps growth always come unstuck at some point because their deal making ability is linked to their rising share price. As soon as their share price falls for whatever reason the deal-making stops, as does the growth and the rating goes. Hence the shares could have much further to fall even if there doesn't appear to be any skeletons in the QPP closet.

It always surprises me how investors often value growth by equity-financed-acquisition the same as organic growth or acquisition from FCF. I guess it is a form of the accrual anomaly where the market fails to see through the headline figures to see the true nature of the earnings.

Danger (No Position)

Book: Excellent Investing: How to Build a Winning Portfolio
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V4Value 9th May '13 6 of 8

Hi Paul,

Any particular reason why you don't cover AIM listed Armour Group (AMR)?
They had an interim statement out today.


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SevenPillars 9th May '13 7 of 8

Quindell have released a statement. Not much in it, but will be interesting to see if it stops the rot or simply raises more questions.

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Paul Scott 9th May '13 8 of 8

In reply to post #73139

Hi Anthony,

I was in a rush this morning, as I had to jump on a train to London as I attended the Value Investor Conference today. Also, I can't cover every results or trading statement for small caps each day - I just highlight the ones that I think look the most interesting.

Cheers, Paul.

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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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