Lombard

Last updated: April 22, 2014 7:46 pm

The Joker’s on Quindell

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Shares plunge means fat profit for shortseller Gotham City

Holy mackerel, Batman! A shortseller called Gotham City Research has triggered a 40 per cent plunge in the shares of Quindell, darling of the bulletin boards. That represents a fat profit for the sceptic named after the home of Bruce Wayne and a whacking loss for bulls. The fragility of shares in growth companies with arguable earnings is thus epitomised.

The UK’s baroque libel laws preclude Lombard from debating the credibility of Gotham City’s allegations. However, Quindell’s own 2013 accounts are not off limits. These show the group generated cash of just £10.4m from operations. After deductions, that fell to a negative £8.9m.

The quantity of hard money coursing through Quindell’s veins is strikingly small for a group that reported pre-tax profits 200 per cent higher at £82.7m on sales of £380m.

The Aim company, led by founder Rob Terry, says it has been investing for growth. But Gotham City would have less traction if the complexity of its prey did not also foster uncertainty.

Quindell, which aspires to join the FTSE 250, is active in motor insurance claims management, a business exposed to tightening regulation and the iron whims of insurers. Quindell also sells software, a product where some fine judgments have to be made over revenue recognition. A third string to its bow is telematics. And as anyone with a dead satnav unit in their car glovebox knows, obsolescence can be a problem here.

There can be no doubts concerning the objectivity of Gotham City, which is more Joker than Caped Crusader. As a short, it has none. But it would have a job to destabilise a big, straightforward business that generated lots of cash. In that sense, Gotham and Quindell deserve one another

Apothecaries vs boffins

Got a sniffle? GlaxoSmithKline can soothe your runny nose. Got cancer? Then Novartis may be able to save your life. GSK is swapping its oncology business for a net $9bn and the consumer and vaccines divisions of the Swiss drugs group.

Seeking a cure for the Big C is the traditional test of virility for a big drugs group. By partially withdrawing from that battle and paying out £4bn to investors, GSK signals two messages. First, that pharma giants need to specialise in targets for drug development as paybacks drop. Second, that as the industry consolidates, the diversified model pursued by boss Sir Andrew Witty will be a winner.

Selling Savlon and nicotine patches may look prosaic to a research-driven fundamentalist such as Pascal Soriot, boss of AstraZeneca, which Pfizer has aspired to buy. But as proof of high failure rates, the total projected revenues of anti-cancer drugs under development have sometimes exceeded world pharmaceutical sales.

Novartis must believe that GSK treatments such as Mekinist for skin cancer are pretty special. It is paying up to $16bn for the division, seven times forecast 2014 sales and four times peak expected revenues. The 63.5 per cent stake GSK is taking in the consumer joint venture is, meanwhile, smaller than its 72 per cent contribution to sales would justify, though that may reflect lower profitability.

Sir Andrew says the deal will cut costs, raise earnings and focus GSK on respiratory diseases, vaccines, HIV and consumer products. The list of other GSK businesses is still long. But there will be further disposals. And it is good to see the group seizing the initiative after a period when the share price has been pushed sideways by corruption allegations.

Card player

Our lives are measured out in greetings cards, from congratulations on our first, lung-clearing wail to condolences on our last gasp. That emboldens Card Factory, which sells the items, to trumpet the robustness of its sales as it prepares to float at an equity value of over £700m.

The line would be more convincing if Clinton Cards, a rival, had not gone into administration in 2012. The group took on too many costly leases, a peril Card Factory should beware of as it seeks to expand from 733 to 1,200 stores.

It may help that Card Factory targets low-budget shoppers. The group claims to keep costs down by designing and printing its own products. Thanks to Photoshop, limited skill is needed to superimpose a party hat on a snap of a chimp these days.

Would-be investors should ponder affordability as carefully as Card Factory’s own customers do. The mooted rating is about 10.5 times 2014 underlying earnings to enterprise value.

This does not look excessive in today’s toppy market. But investors should be alert for tapered capex. Cards offering “commiserations on your mediocre investment” are not available. If they were, nobody would want to get one.

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