Amigo Holdings PLC – Scrapped Dividend and Warns Regarding Increase in Loan Provision, Albeit Reached New Agreement with the FCA.

Amigo Holdings PLC (LON: AMGO) is a FTSE All-Share listed Company, which operates as a provider of loan guarantor in the United Kingdom.

Recent News
3 July 2020: The Company entered an amended Voluntary Requirement (VReq) with the FCA (Financial Conduct Authority). Under the agreement, the Company must deal with all the complaints by 30 October 2020. Also, the VReq cost is expected to be higher than the previous estimate (announced on 8 June 2020) of £35 million. Further, the Company updated regarding the substantial liquidity with cash over £136 million as at 30 June 2020.

11 June 2020: The Company announced that Stephan Wilcke, the Chairman of the Board, has stepped down from his position. He will be succeeded by Roger Lovering (as Chairman) until the Board appoints the permanent replacement.

Market Update (as on 8 June 2020, USD Million)
In this update, the Company affirmed regarding the significant increase in customer complaints due to backlog arisen in 2020. Hence, the Group was expecting to incur at least £35 million as the cost for clearing the complaints. Considering the increase in provision, the Board decided not to recommend a final dividend for FY20 (ended 31 March 2020). Further, the Company announced that it had terminated the ‘Formal Sale Process’ with an immediate effect. Previously, on 27 May 2020, it had received a proposal from a potential acquirer to capture entire issued capital at 20.9 pence per ordinary share. As of 25 May 2020, the Company reported a sufficient financial headroom with a cash balance of over £115 million.

Share Price Performance
  
6-Month Chart as at 3 July 2020, before the market close (Source: Refinitiv, Thomson Reuters)

AMGO’s shares were trading at GBX 12.42 on 3 July 2020 (before the market close at 2.25 PM GMT+1), which was up by 46.12% against the last day closing price. Stock 52 week High and Low were GBX 192.40 and GBX 4.84, respectively.
From the technical standpoint, shares were trading well below the support level of 100-day simple moving average prices, which reflects a downward trend in the stock and carrying the potential to move down further.

Risk Assessments
During Q3 FY20, the Company announced a significant decline in profit after tax. Moreover, the Company is anticipating an increase in the provision and operating expenses due to a rise in complaint costs. Furthermore, the Company is going through a transition period from the management perspective as the Chairman and Chief Executive Office have recently left their position; hence, it raises further concerns regarding the strategic growth plan. Also, the performance can also be affected by risks related to macroeconomic factors, cyber threats, Brexit, and liquidity risk.

Conclusion
Apart from above-mentioned risk factors, the Company has sufficient liquidity in place to manage fund operations and support customers during the difficult period. During Q3 FY20, the Company also witnessed significant growth in the number of customers and net loan book, which resulted in an increase in revenue. Further, the Group has reached a new agreement with FCA and received extended timeframe to manage all the complaints though the cost related to VReq is expected to be higher than £35 million.

Therefore, based on the above rationale, we have given an “Avoid” recommendation at the current price of GBX 12.42 (as on 3 July 2020, before the market close at 2.25 PM GMT+1).

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