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By Tom Winnifrith & Steve Moore | Tuesday 14 July 2015
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
First the polite Steve Moore, the rather more brutal TW to follow. SM: Towards the end of last month I noted that as Quindell plc (QPP) had been in the news, the acquirer of its Professional Services Division, Slater & Gordon, had been in the spotlight in Australia – S&G eventually admitting that the Australian Securities & Investment Commission had been in contact with its auditor, though that “we remain very confident in the robustness of our accounting practices”. Hmmm…
I concluded (see HERE) with some general words of investment wisdom from Warren Buffett and hopefully these were heeded as just days later shares in S&G crashed as the company informed that it had been notified that the Australian Securities & Investment Commission “intends to raise some queries” and that, having commenced a detailed analysis of the financial information to be provided to the Commission, two errors in the method used to report receipts from customers and payments to suppliers and employees by the UK business had been identified.
The company emphasised that “net operating cash-flows, as reported, remain unchanged”, with it to provide a further update to the market this month regarding an assessment by Ernst & Young of its responses to queries raised by the Commission.
I previously suggested that the acquisition of the division from Quindell in conjunction with previous rapid acquisitive growth and vast amounts of intangibles, work-in-progress and receivables on the balance sheet meant reasons for caution and the recent developments look to offer very little reason to be very confident in the robustness of the accounting practices here.
Warren Buffett stated “never invest in a business you can’t understand”. With the company itself seemingly struggling to understand the vagaries of accounting for its business, how can the outside investor hope to? As usual, I’d follow Buffett’s advice here.
TW: Shares in Slater & Gordon peaked at A$7.95 after the Quindell deal was announced. It raised cA$900 million in fresh equity to fund the transaction at A$6.37 a share with mug punter institutions lapping it up. The shares are now $3.50 so what happens next?
In terms of the stock price it is still way overvalued? S&G’s accounting practises look dodgy and are under review. That is bad enough. There is a potentially huge fine coming its way from the ATE mis-selling scandal (see HERE) but above all its valuation is insane. At A$3.50 the market cap is cA$1.3 billion but there is also debt on top of that of cA$450 million.
The core S&G business might just generate free cashflow of A$75 million in the year to June 30 2016 but with the added debt from the Quenron deal shall we call that A$50 million. But the Quindell businesses have never generated cash so the group number is going to be somewhere between 0 and A$50 million – in other words this stock is now on a free cashflow multiple of 35. And that is for a business going ex-growth, with a potential nightmare ATE liability and which – if the Quindell businesses really tank – might even struggle to make interest payments.
This stock remains a stonking sell. It may have halved but it could well halve again.
History shows that if a listed company buys a Rob Terry fraud it ends up the loser. Check out the way Terry brought down Canada’s Lava Systems in the late 90s after it paid him cash for his SCS business only to find that its projected revenues were largely bogus. Lava went tits up within a year. How Terry avoided jail time for that remains a mystery.
At what point to the thick as shit institutions who supported the S&G placing cry foul and consider a class action citing both S&G’s own accounting “issues” but also its consummate lack of due diligence in paying so much for the Quindell shite? Will it be when the UK’s Serious Fraud Office and FCA lay bare the scandals at Quindell? Or perhaps when Rob Fielding, the ex CEO of Quindell who now heads up the businesses S&G bought is led off in cuffs – much to the dismay of HR manager Mrs Jill Harrison – over the £2 million bung he got from Quindell when it spunked away £30 million buying a worthless business from convicted Nigerian fraudster Andrew O’Dua? Or perhaps when Slater shares slump below A$2 as they surely will.
Anyone who took part in the S&G placing was mugged. Surely they will seek restorative justice at some point?
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