The 2019 Amigo share price collapse

Back in June 2019, the Amigo share price was trading at around 292p. Since then it has fallen by 95%. So what happened? Concerns started brewing among investors regarding the firm’s ability to collect payments from its borrowers. And what started out as a steady decline quickly turned into a crash, following the publication of a quarterly earnings report.

The report showed that the ratio between revenue and loan impairments had grown to 30%. That means a plenty of customers weren’t paying their bills on time. And so guarantors were having to pick up the tab, subsequently leading to a massive rise in customer complaints, which ultimately sparked an ongoing investigation by the Financial Conduct Authority (FCA).

Meanwhile, a conflict erupted between company founder James Benamor and the management team. After openly accusing them of making Amigo commit “slow-motion suicide”, Benamor threatened to liquidate his 60% stake unless shareholders voted to elect a new management team. This coup ultimately failed, and the Amigo share price continued to collapse.

Time for a comeback?

The rising complaints of both customers and creditors have led the management team to apply for a Scheme of Arrangement. If successful, this could allow all parties to be satisfied while simultaneously allowing Amigo to restructure itself and its balance sheet. The process has already begun following approval from the UK High Court last month. However, the final decision won’t be made until 19 May.

Besides this, the management team is also actively seeking to sell the entire business. In fact, it had previously received a formal offer of 20.9p per share last year. This has yet to materialise into a finalised and signed deal. But if it were to go through, or another similar offer is made, then based on the Amigo share price today, it could represent a potential return of around 30%.

The bottom line

The business looks like it’s taking the rights steps to turn itself around. However, this process is likely going to take several years, even with the most optimistic outcomes. Therefore, I’m sceptical that the Amigo share price is going to recover in 2021.

Over the long term, perhaps a recovery will eventually take place, assuming it doesn’t get acquired. But at this stage, I see an exceptionally high level of risk attached to this business. Even the management team acknowledged this by stating that if it fails to acquire the Scheme of Arrangement, the company will likely go bankrupt. Therefore I won’t be adding any of the shares to my portfolio today.

The post Will the Amigo share price recover in 2021? appeared first on The Twelfth Magpie.

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Zaven Boyrazian does not own shares in Amigo Holdings. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Amigo stock price

Investors are currently feeling friendlier towards Amigo, but the stock has struggled since its FTSE 250 listing last June, when it started trading at 286p. Today, the Amigo Holdings share price stands at 221p, down almost a quarter.

The outlook is promising with City analysts predicting strong earnings growth. So should you buy shares in Amigo Holdings for your Stocks and Shares ISA?

Friend in need

First, it’s worth understanding what Amigo does. It aims to help those who cannot borrow money from mainstream lenders, typically due to a poor credit rating, by giving them loans up to £10,000, with the applicant using a family or friend as a guarantor.

Amigo says it offers an alternative to payday loans, one that gives borrowers with bad credit the opportunity to rebuild their credit score. However, it’s also worth noting its loans cost a hefty 49.9% a year. Mainstream personal loan rates range from 3% to 15%, depending on your credit rating and how much you borrow.

Rising custom

Customer numbers hit 224,000 in the year to 31 March, a rise of 23.1% on last year’s 182,000. Revenues climbed 28.4% over the year to £270.7m, beating consensus estimates of £258.1m.

Amigo also posted net loan book growth of 17.4% to £707.6m and said 95% is either fully up to date or within 31 days overdue, which demonstrates the underlying credit quality. It also announced a final proposed dividend of 7.45p, giving a total annual dividend of 9.32p. This works out as a 50% payout and “is above expectations at IPO.”

Sub-prime rates

Non-mainstream lending is a controversial area and Amigo must tread carefully to avoid incurring the wrath of regulators. Today, the group said it’s “already in line with the direction of travel suggested by the recent FCA statements on the growth of the guarantor loan segment.” It also pointed out it was named as the highest-rated personal loan provider for transparency of information during 2019 by Fairer Finance.

Amigo operates in the mid-cost credit space, which the FCA defines as “credit above prime borrowing rates, but below the high-cost short-term credit cap of 100% APR.” It appears to be trying to do the right thing in a tricky market, with a simple product and transparent pricing. But time will tell.

Complicated

As Rupert Hargreaves recently noted that, ethical considerations aside, companies like Amigo do provide an essential service. He tipped the stock when it was trading at 11.3 times forward earnings. Today, you can buy it at just 7.3 times, which looks attractive, especially since its PEG ratio is just 0.5.

The forward yield is a handy 4.5%, with cover of 2.6. City analysts are positive, anticipating earnings per share growth of 17% next year, and 22% the year after. The worry, as ever, is that an economic downturn could hit loans quality, and profits. The sub-prime lending sector can be rather complicated at times.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Bad credit

However, there were positive numbers too, with revenue up 34% to £201m over the nine months to 31 December, while adjusted profit after tax of £72m was up 37% on the previous year.

It also signed up a further 10,000 customers, while its net loan book grew 15% to £695.7m. Amigo, which floated in London last June, also made its first loans to customers in Ireland this month. Arrears don’t seem to be a problem, with 95% of its loan book either fully up to date or within 31 days overdue.

Brexit bothers

Amigo provides guarantor loans to borrowers who are unable to borrow from traditional lenders due to poor credit histories, offering borrowers with poor credit backgrounds a potential lifeline. It’s a simple business offering a single transparent mid-cost product, a guarantor backed loan at 49.9% APR with no additional charges or fees

CEO Glenn Crawford hailed another strong set of results, “delivering further growth in our customer numbers, loan book and revenue, whilst continuing to carefully manage our impairment levels”. It recently secured lower funding lines and remains confident of delivering full-year objectives, despite Brexit uncertainties.

Sub-prime investment

Investors aren’t so impressed and the stock trades at just 9.6 times forecast earnings with a PEG of 0.6. On the plus side it does offer a forecast yield of 4.1%, generously covered 2.6 times. Operating margins are an impressive 48.1%, while earnings are forecast to grow by 17% and 23% over the next couple of years. These are promising numbers especially if it can continue to keep a list of impairments, even if we do get some Brexit bumpiness.

The non-standard loans sector can be a rough business to be in, just ask investors in doorstep lender Provident Financial (LSE: PFG). By definition, businesses are lending money to people who are more likely to default than mainstream borrowers, although this also gives them the opportunity to charge dramatically higher interest rates which should more than cover the risk. Provident also sells high-interest Vanquis credit cards, payday loans and car finance through its Moneybarn brand.

Low expectations

The group has lost three-quarters of its value over the last three years following a string of profit warnings, as well as the shock departure of its chief executive Peter Crook and a scrapped dividend. In 2017, the Bradford-based group alerted investors to losses of between £80m and £120m in its home credit business this year after it changed the way it collected loans. Other issues included a £169m compensation bill and a £2m fine for mis-selling financial products.

It has continued to give investors a bumpy ride this year, plunging 20% in mid-January after warning that earnings would be at the low end of expectations.

Takeover question

Non-traditional lenders also have to cope with stiffer regulation, which saw off Wonga last year, after the Financial Conduct Authority imposed a cap on payday loan repayments.

Fund manager Neil Woodford, who owns 25% of Provident’s stock, is backing a surprise £1.3bn takeover by Non-Standard Finance but Roland Head says don’t buy into it. You might be tempted by the group’s forecast valuation of 11.4 times earnings, 5.5% yield and major turnaround potential. I’m not, though.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

However, since the beginning of 2019, the shares have staged a modest recovery, rising around 2% year-to-date. They were, at one point, up more than 23% for the year. 

These gains seem to suggest that investors are returning to the stock, but I’m not convinced. I think IQE’s future is more uncertain than ever.

Uncertain outlook

Over the past few months, some of the world’s largest computer chip manufacturers, including Nvidia, Micron, CML Microsystem and AMS, have all informed investors they now expect growth for 2019 to come in below expectations. Nvidia, in particular, issued a vast revenue warning at the end of January, lowering its fiscal fourth-quarter outlook to $2.2bn, from $2.7bn.

These developments tell me that the whole semiconductor market is suffering from oversupply and falling demand. It’s logical to assume IQE is having the same problems and, with this being the case, I don’t think investors can trust the City’s numbers when it comes to its future growth. 

Those analysts had been expecting the firm to report earnings per share of 3.9p for fiscal 2019, up 71% from 2018’s estimate of 2.3p. Considering what’s happening in the rest of the semiconductor industry, I reckon IQE will struggle to meet these numbers. And if the enterprise does miss expectations for growth, the share price could crash as it’s currently dealing at a forward P/E of 29.2, a multiple that gives the company no earnings leeway whatsoever. 

Undervalued

At the other end of the valuation spectrum, there’s Amigo Holdings (LSE: AMGO). Amigo provides guarantor loans to borrowers who are unable to borrow from traditional lenders due to poor credit histories. 

Ethical considerations aside, companies like Amigo do provide an essential service. Hundreds of thousands of people in the UK are cut off from traditional banks because of poor credit backgrounds, and Amigo can offer them a lifeline.

From an investor perspective, the business is attractive because it requires almost no capital to set up and generates a relatively attractive profit margin of 35%. The group’s return on capital employed — a measure of profit for every £1 invested in the business — was 10.2% for 2017, putting the business in the top third of the most efficient companies in the UK. 

City analysts expect Amigo’s earnings to more than double over the next two years, rising to 24.8p for fiscal 2020, from 11p as reported for 2017. The group is expected to distribute 5p per share as a dividend for 2019, giving a yield of 2.1%. Current forecasts have the yield doubling in 2020 to 4%. 

What’s more, the stock is also trading at an undemanding forward P/E of just 11.3, which only adds to its appeal. These metrics put Amigo, in my opinion, head and shoulders above IQE as an investment. 

The post Tempted by the IQE share price? I’d buy this FTSE 250 growth stock instead appeared first on The Twelfth Magpie.

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• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Dog’s life

The £568m FTSE 250 firm, whose stores offer pet supplies, in-store vets, and grooming salons, has cut prices while restructuring costs in its vets business have increased. Underlying gross margins fell by 160 basis points to 50.3%. Its struggling vets business is in need of an overhaul as its partners struggle to pay the company’s fees and earn enough for themselves, while EU vets leave Brexit Britain, forcing up salary costs.

Underlying group free cash flow rose 17.7% to £27.3m, and the group said the UK pet care market remains resilient, growing at 3-4% a year. Group CEO Peter Pritchard, who took over in May, said Pets has “the ability to offer almost everything a pet owner needs, giving us opportunities our competitors simply don’t have,” and is now delivering a plan for sustainable cashflow and profit growth.

Furry friend

Pets at Home has been caught up in the wider UK retail slowdown and, as Brexit drags, it’s hard to get excited about any stock in this sector. Under the circumstances, today’s report isn’t bad. The problem is that those circumstances include a share price drop of 37% over the last year, and 55% over five years.

This has knocked the valuation down to a bargain price 8.4 times earnings. The forecast yield is a tempting 6.5%, with cover of 1.8, despite the dividend being held at 2.5p per share today. Roland Head reckons it’s too cheap to ignore, and Britons do love their furry friends.

Friend in need

High interest lender Amigo Holdings (LSE: AMGO) is down 1.5% today, despite reporting a rise in revenues and profits in its first set of interim results since floating in July.

Today’s report for the six months to 30 September featured a 40% year-on-year increase in revenues to £130m, and a similar-sized increase in adjusted profit, after tax, to £47.2m. The group also added another 52,000 customers, taking the total to 207,000, a rise of 34%, while its net loan book rose 24% to £671.7m.

Amigo, which now has a market capitalisation of £1.25m and joined the FTSE 250 in September, also announced its maiden interim dividend of 1.87p per share.

Loan arranger

It offers a single guarantor loan product to those unable to get finance from traditional providers. But it also faces headwinds, as today’s figures show the group’s impairment charge rose from 19% to 23% of revenue.

The stock is, nonetheless, up 10% in the last month, and Paul Summers reckons it’s one to watch. Trading at 12.1 times earnings, now could be a promising entry point. City analysts are pencilling in 38% EPS growth in the year to 31 March 2019, and another 17% the year after. By then, the yield is expected to hit 3.7%. Maybe it’s time to add a new friend to your watchlist.

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harveyj has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.