Troubled Quindell begins fightback against Gotham

INSURANCE and telecoms outsourcing consultancy Quindell will this week seek to convince doubters that its breakneck growth is based on firm foundations and that it is turning claimed sales into cash in the bank.

Previously one of the darlings of the stock market, Quindell is under severe pressure following an attack from secretive American firm Gotham City Research, which issued a report alleging the company’s rapid expansion was built on sand.

Gotham City, believed to have been founded by analyst Daniel Yu, could stand to gain if Quindell’s shares fall, using a method of trading called short selling. However, it has not said that it has a ‘short’ position in Quindell shares.

Quindell issues first-half profits on Thursday, with its shares still well below their value before Gotham’s attack. Broker Canaccord expects it to report interim revenues of £810million and profits of £320million. For the full year 2013, revenues were £380 million and profits £134million. The figures are set to be dominated by questions over cashflow, because revenues are often booked in advance.

‘The business model at Quindell involves upfront cash out, often in the form of a commission or marketing payment, or the cost of vehicle hire, or any other cost related to the processing of an insurance claim and then payment for these services on average up to six months later,’ analysts at Canaccord said.

As well as processing car insurance claims, Quindell also provides the software for in-car ‘black boxes’ that track the quality of an individual’s driving, and it is hoping to make big profits from processing noise-induced hearing loss claims.

The company has grown rapidly through acquisitions. ‘Quindell is highly acquisitive, which creates challenges in terms of understanding what the different parts of the business do and how they fit together,’ Canaccord analysts said.

The company was worth more than £2.5 billion before Gotham issued its report. Its shares closed last week at 173p, valuing it at £725 million. Quindell said it has begun legal action against Gotham.

Gotham issued a report into Spanish technology group Gowex last month alleging its shares were worthless. Several days later, Gowex’s chairman and chief executive resigned, acknowledging it had issued false accounts.

Quindell issued a trading update last month to say that its operating cashflow was positive in July, prompting its shares to climb 30p.

There have been questions about Quindell’s tie-up with the RAC. The two signed a deal to provide black boxes to young drivers, but there have been reports that none have yet been installed. The firm has said only that it ‘has not fallen out with the RAC’. ‘With regards to the timing of the roll out, we shall update the market when appropriate with the RAC,’ a spokeswoman said.