Is the Amigo share price about to surge back above 50p?

A run of good news could send the Amigo share price back above 50p says Rupert Hargreaves after looking at the group’s prospects.

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The Amigo (LSE: AMGO) share price has nearly doubled in value over the past month, thanks to a series of positive updates from the business. These updates could be just the beginning of the company’s recovery story. 

Amigo share price recovery

I last covered the lender back at the beginning of July. At the time, I said that while the business is facing some significant headwinds, it also has plenty of opportunities. 

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The most significant risk facing the Amigo share price is insolvency. Luckily, it looks is if management’s recent actions have significantly reduced the risk of this worst-case scenario. The group recently announced it had reached an agreement with its creditors on its lending facility, taking pressure off the business.

The company has been able to reduce the size of the facility as all cash generation arising from customer loans is being used to reduce debt. What’s more, at the end of July, Amigo’s unrestricted cash balance was £145m. 

Looking at these numbers, I reckon the company has come back from the brink. As it continues to improve its financial position, investor sentiment towards the Amigo share price should continue to improve. 

At the same time, the company’s founder, who had been pushing for significant change at the business, has been selling his stake. He promised to do so after being defeated at a shareholder vote earlier in the year. This suggests he’s given up on his activist campaign against the current management.

I think this is a positive development for the company and its investors. Management can now concentrate on dealing with the group’s issues with regulators and customers rather than fighting itself. 

Work to do

This has been a busy year for Amigo. At one point it looked as if the corporation wouldn’t survive. However, it now seems to me as if the business is getting itself back on track. It’s not out of the woods just yet, but the company has made some significant strides towards stability in the past few weeks and months. 

If this trend continues, I think it’s likely the Amigo share price can return to the level at which it started the year.

The stock was changing hands at around 66p at the beginning of 2020 before the management infighting began and investors started asking questions about the firm’s solvency. I think if the group can put its historic issues behind it and start making loans again, it could take market share from struggling peers in the high-interest loan market. 

That said, there’s no guarantee the company will return to growth. A surge in loan defaults or compensation claims against the firm could overwhelm its balance sheet. As such, it may be best to own the Amigo share price as part of a diversified portfolio.

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Rupert Hargreaves 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.

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