FTSE 250 guarantor loans lender Amigo Holdings (LSE: AMGO) is short of friends on the stock market today with the stock down almost 5% after reporting slower profit and revenue growth for the third quarter.
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.