|Shares Out. (in M):||445||P/E||0||0|
|Market Cap (in $M):||573||P/FCF||0||0|
|Net Debt (in $M):||587||EBIT||0||0|
This one is a very simple idea, but seems an exceptional risk/reward.
The accounting irregularities related to QPP’s divested businesses and the company’s poor corporate governance under the helm of ousted founder Rob Terry are well documented by short sellers and the media. However, an attractive opportunity remains in the wake of prior chaos.
What we have now is a hairy but highly attractive situation where the “new” QPP is trading at a discount to cash with several potentially underappreciated assets. Downside is limited as the company has committed to returning excess cash to shareholders in the near-term (we believe in the form of a tender offer). We believe there is the potential to make a meaningful return of at least 25%, and potentially as high as 60-70%, within the next 6-7 months.
QPP is tainted by the exposure of poor corporate governance and aggressive accounting under the helm of ousted founder Rob Terry.
Gotham City Research posted a short report in Apr-2014, and the stock fell by over 90% from peak to through last year. The whole debacle was covered extensively in the FT's Alphaville column.
QPP is now under different leadership, and is a very different animal (mostly cash).
Chairman (Rob Terry) has resigned, along with the former Finance Director (Laurence Moorse). Current CEO (Robert Fielding) will move to Slater & Gordon, who has acquired the majority of QPP's legacy business. QPP has a new Chairman and Finance Director, and has commenced a search for a new CEO.
QPP sold the Professional Services Division (which generated the bulk of its revenues/profits and where most of the aggressive, or inappropriate, accounting occurred) to Australian firm Slater and Gordon (S&G) last month for an initial cash consideration of £637m, in addition to a contingent cash consideration payable in respect of the future settlement of its noise induced hearing loss (“NIHL”) cases that will now be managed by S&G.
QPP will now focus on its remaining businesses, which include the gathering of telematics data in cars and using that data to broker car insurance policies (under their Himex, Iter8, and Ingenie brands). QPP will also continue to sell enterprise software to insurers to help them manage claims.
The company has committed to return cash to shareholders in the near-term (before end of November).
The company has announced that the initial tranche of capital returned to shareholders will be “at least £1 per share and up to a maximum of £500mm in total” (which would imply £1.12 if all remaining shares are tendered).
We expect that the return of capital will be in the form of a tender offer as the company is looking to achieve the reduction of capital in a tax efficient manner.
SOTP implies attractive upside
Est. pro-forma cash balance (after tender offer, debt repayment and estimated H1 2015 cash burn): ~£90m, or 20p per share
Cash in Escrow: £50m will remain in escrow for 18 months to cover QPP's reps and warranties to S&G, but this may ultiamtely be paid out to Quindell, in whole or in part. Value at zero in a base case.
Tender Offer: Return of capital of at least £1 per share and up to a maximum of £500mm in total (which would imply £1.12 if all shares are tendered)
Value of retained businesses: According to revised figures (provided April 1, 2015), the telematics businesses that Quindell will retain generated £8.5mm (£17mm annualized) of EBIT in H1 2014. These businesses are growing, generate healthy margins, and we believe could be worth as much as £300m (~67p per share on current share count), and seemingly must be worth at least £100m (22p / share) in a base case.
NIHL proceeds: QPP will also receive 50% of the profits from the ongoing 53,000 industrial deafness claims that now will be managed for cash by S&G. According to S&G’s own estimates (see S&G’s 3/30/2015 M&A call), QPP’s stake should be worth approx. £40m (~9p per share on current share count). Value at half this amount in a base case, although S&G has suggested its valuation is conservative.
Adding it all up, SOTP seems to be a range of 700-983m, or 1.57p - 2.21p per share before the tender offer, which represents 22-72% upsiude from the current price. The stated goal to return the full 500m in cash seems to require that the tender offer will need to be done at a higher level than the current price to be successful.
A dynamic model is required to fully appreciate this idea, but I would recommend spending the 15 minutes (or less) it will take to put these numbers in a spreadsheet and play with the assumptions. It becomes apparent very quickly how difficult it is to construct a scenario where money is lost from purchasing the shares at the current price, whereas upside cases appear very attractive. In this market, I would like to find more opportunities like this one.
The value per share will ultimately depend in part on where the tender price is set, and how many shares are tendered at that price, but we believe there is limited downside here and upside is 20-70%.
Tender document is filed in early October(?)
Tender is completed in November
Proceeds from NIHL claims may flow back to QPP
Escrow account may be released back to QPP in Q4 2016
Remaining telematics businesses may be sold