The Amigo Holdings (LSE: AMGO) share price has now fallen by 30% from the high seen earlier in March. The stock’s latest fall came after the guarantor loan company revealed that the UK’s Financial Conduct Authority (FCA) is extending its current investigation into Amigo’s business.
In addition to investgating Amigo’s past lending practices, the FCA is now also investigating how Amigo has handled the wave of complaints it’s faced over the last year. These have threatened to overwhelm the company, which has suspended new lending.
Amigo shares are down by a relatively modest 16% over the last year, but they’ve lost 95% of their value since the company’s flotation in June 2018. I think it’s safe to assume that this business has serious problems.
Spiralling out of control?
Amigo specialises in guarantor loans. These are loans where the borrower doesn’t qualify for credit, but a second person offers to guarantee their repayments. With a typical interest rate of 49.9% APR, according to Amigo’s website, it’s an expensive way to borrow money.
Despite this, growth was strong when the company floated in 2018. Amigo’s 2018–19 results showed adjusted pre-tax profit rising by 38% to £100m. The group’s loan book increased by 17% to £708m during that year.
Amigo’s share price started to slide in August 2019, when the company flagged up the FCA’s growing interest in the guarantor loan sector. With an 80% share of this market, I thought that Amigo was likely to attract further interest.
Sure enough, in May 2020, the FCA launched an investigation to make sure Amigo had been checking the affordability of new loans correctly.
Around the same time, the number of complaints received by the firm about historic lending began to rocket higher. In June 2020, Amigo estimated that it would need £35m to clear the backlog of complaints. By December 2020, the company was budgeting for a cost of £150m to resolve all of the complaints it had received.
Is Amigo Holdings’ share price heading to 0p?
Will Amigo survive? I don’t know. The company is currently trying to reach a “scheme of arrangement” that will allow it to pay a fixed amount now to resolve complaints, plus a share of any future profits.
In the meantime, Amigo is continuing to collect loan repayments, but isn’t issuing any new loans. As a result, customer numbers fell by 33% last year, while revenue fell 37%.
My concern is that as a potential investor, there’s nothing I could use to value the shares as a going concern. Even if the company fixes all of its problems, I suspect that tougher regulation on high-cost credit will make profits lower than in the past.
In my view, buying Amigo shares is a pure gamble. I think that the share price could fall to zero or it might double. That’s too speculative for me, so this is a stock I plan to avoid.