One UK penny stock that’s had a great run recently is Amigo Holdings (LSE: AMGO), a guarantor loan company. Over the last three months, its share price has risen from around 8.5p to 24p – a gain of around 180%. Over one year however, the stock is only up around 5%.
Should I buy this penny stock for my portfolio? Let’s take a look at what’s driving Amigo’s share price higher.
Why Amigo’s share price rose
In my last article on Amigo Holdings, published on 9 March, I mentioned that one of the key risks surrounding the company was complaints from customers. Between October and December last year, the Financial Ombudsman Service received more than 10,000 complaints about the firm, up from just over 300 in the same period a year before.
Late last year, Amigo decided that the best way to address this problem was through a ‘Scheme of Arrangement.’ This is a court-approved agreement between a company and its shareholders or creditors. This would cap its potential compensation payments in relation to the complaints and allow Amigo to restructure itself.
For a few months, things were going to plan for Amigo. In late March, for example, the UK’s main financial regulator, the Financial Conduct Authority (FCA), stated that it had completed its assessment of the terms of the Scheme of Arrangement and said that it was not proposing to take any additional regulatory action that might stop the scheme. This saw the AMGO share price move higher.
However, last week, Amigo advised that it had received a letter from the FCA stating that the regulator felt the scheme was unfair and that it planned to oppose it at a final court hearing (which takes place tomorrow). This was obviously bad news for Amigo. If its Scheme of Arrangement fails, the company is likely to go bust, according to CEO Gary Jennison. On the back of this news, Amigo’s share price fell over 20%.
It’s fair to say that this recent development adds risk to the investment case. However, it’s hard to know if the FCA is serious about stopping the move. If the regulator was to stop it, and Amigo went bust, it would not be a good result for claimants. We are likely to have more clarity on the situation tomorrow after the court hearing. If the scheme is approved, there will be less uncertainty.
My view on Amigo Holdings
Looking at what’s going on at Amigo right now, I see the penny stock as quite risky. Given the binary nature of the court hearing, the stock is very speculative in nature.
There are also a few other issues that concern me in relation to Amigo Holdings. One is the company’s balance sheet. At 31 December 2020, Amigo had net borrowings of around £180m. By contrast, shareholders’ equity was just £81m. This debt means the company is quite vulnerable.
Another concern is growth forecasts. For the year ending 31 March 2022, analysts expect Amigo’s revenue to fall about 45% to £102m. That’s concerning.
Of course, there are some positives. Recently, the company appointed a new management team. Some directors even bought Amigo shares.
All things considered though, I see Amigo as too risky for my portfolio. I think there are better penny stocks and growth stocks I could buy today.
Edward Sheldon has no position in any 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.