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Amigo in limbo

Rising complaints and an evolving regulatory response continue to ground shares in the guarantor loans company
November 29, 2019

Less than 24 hours after receiving the Financial Conduct Authority’s (FCA) review into the market it leads, Amigo Holdings (AMGO) sought to use half-year results to put to bed doubts about its guarantor loans model. Though the market’s response was initially positive, plenty of questions remain.

IC TIP: Hold at 68p

For a start, while Amigo said the review did not “raise concerns with the guarantor loan product itself nor made comments about the underlying business model at Amigo”, the FCA has identified ways in which customers can be better informed about the product.

One place to start might be the assurance that “less than 10 per cent of payments are made by guarantors”. Amigo accepts this isn’t the same as explaining to guarantors how likely they are to make at least one payment, but cites “commercial sensitivity” for not publishing the proportion of guarantors who end up on the hook.

From an operational perspective, Amigo also appears to be in limbo. Although customer numbers rose throughout the period, the net loan book has stalled at £731m since the company re-set expectations in August. The impairment ratio climbed over the same period, while management conveniently redefined the cost-to-income ratio to exclude a £10.4m “complaints provision” to cover the cost of redressing customer-initiated claims.

It’s hard to square this apparently one-off hit with its stated intention, which is to reflect the “evolving interpretation of appropriate lending decisions” as well as “an estimate of expected valid future complaints relating to existing loans”. To the casual observer, it appears Amigo is recalculating its cost base in real-time, under the regulatory spotlight.

That spotlight has not gone away. While no immediate further contact or action is expected from the FCA, chief regulatory officer Nick Beal told us Amigo will remain under the watchdog’s supervisory arm. Moves by company founder and majority shareholder James Benamor to add two non-executives to the board suggest a different kind of supervision is looming, too.

Analyst commentary was effusive. To Goodbody, the impairment numbers provided “an element of comfort”, while Numis described the guarantor model as “a superior product”. JP Morgan kept its overweight recommendation on the stock, but downgraded its adjusted earnings per share forecasts to 16.21p for the year to March 2020, and 19.21p for FY2021.

AMIGO HOLDINGS (AMGO)  
ORD PRICE:68pMARKET VALUE:£ 324m
TOUCH:67.7-68.4p12-MONTH HIGH:298pLOW: 55p
DIVIDEND YIELD:15.5%PE RATIO:4
NET ASSET VALUE:51.7pLEVERAGE:3.2
Half-year to 30 SepTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201813048.48.61.87
201914542.37.83.10
% change+12-13-9+66
Ex-div:09 Jan   
Payment:29 Jan