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After a 45% fall, is this innovative financial stock a buy for 2020?

When your only alternative is a payday loan with super-high interest rates, you might be tempted by a guarantor loan with a rate of around 50%. That’s the idea behind Amigo Holdings (LSE: AMGO), which lends you money if you can find a guarantor. But I’d think twice before I’d be a guarantor for someone who’s presumably a credit risk. Still, I can see the attraction.

The prospects for that model haven’t been as attractive for investors as the company had hoped. Since its IPO in July 2018 at an offer price of 275p, the shares were down 76%. Until market close on Friday, 24 January, that is.

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On Monday, the price crashed a further 45% in early trading, though it recovered some of that during the morning. At the time of writing, the shares are 22% down on the day, for an 80% fall since flotation.

We’d already been looking at very low P/E multiples, and perhaps a tempting valuation. And just a few months ago, fellow writer Karl Loomes was wondering whether Amigo was cheap enough to buy. In fact, at the time I’d seen the shares as a buy myself. But I imagine Karl is pleased he’d seen reason to be cautious, and I’m certainly happy I didn’t invest. 

What happened?

It’s all down to the company’s biggest shareholder, Richmond Group, deciding to sell its 60.66% stake in Amigo.

After the Monday price crash, Amigo’s market-cap is standing somewhere around £250m. So the value of Richmond’s stake stands at approximately £150m. Trying to sell that value of shares on the open market without killing the price isn’t practical. And there’s no buyer lined up yet.

The company has announced a strategic review, which will cover a number of possibilities. Amigo says it “will consider various aspects of the company’s strategy, ownership and operating model, including the potential sale of the company as a whole, the sale of parts of the group, reorganisation of entities within the company’s group, the sale of the UK business, the sale of certain books of business including a potential de-listing of the company’s shares.

So, essentially, anything could happen. And private shareholders might have no say in the matter and could have their shares sold out for them. It’s no wonder there was such a negative reaction. But Amigo is bound to get the best it can for shareholders in any sale, so is there a bargain here?

Trading

Amigo released a trading update along with the shock Richmond announcement, saying it “continues to face a challenging operating environment.” The firm, apparently “remains within guidance for loan book growth and impairments for the period of nine months ended 31st December 2019.” And it says it “remains confident in the robustness of its approach to lending decisions.”

But the firm sees a threat from fears “that there may be increased pressure on our business and a continual evolution in the approach of the Financial Ombudsman Service.” As a result, the strategic review could lead to future lending volumes being hit.

The shares are now on a forward P/E of only 3.3. But with the viability of the company in question, I’m staying away from what I think has turned into a pure gamble.

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Alan Oscroft 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.