The Amigo (LSE: AMGO) share price has been on fire lately. Since the start of this year, it has gone from 7.9p to around 17p today. That’s nearly a 115% increase in the space of only a few months, but it was roughly at that level a year ago. Is this a sign that the guarantor lending business is ready to make a comeback after its 2019 crash? And should I be adding it to my portfolio?
The 2019 Amigo share price collapse
Back in June 2019, the Amigo share price was trading at around 292p. Since then it has fallen by 95%. So what happened? Concerns started brewing among investors regarding the firm’s ability to collect payments from its borrowers. And what started out as a steady decline quickly turned into a crash, following the publication of a quarterly earnings report.
The report showed that the ratio between revenue and loan impairments had grown to 30%. That means a plenty of customers weren’t paying their bills on time. And so guarantors were having to pick up the tab, subsequently leading to a massive rise in customer complaints, which ultimately sparked an ongoing investigation by the Financial Conduct Authority (FCA).
Meanwhile, a conflict erupted between company founder James Benamor and the management team. After openly accusing them of making Amigo commit “slow-motion suicide”, Benamor threatened to liquidate his 60% stake unless shareholders voted to elect a new management team. This coup ultimately failed, and the Amigo share price continued to collapse.
Time for a comeback?
The rising complaints of both customers and creditors have led the management team to apply for a Scheme of Arrangement. If successful, this could allow all parties to be satisfied while simultaneously allowing Amigo to restructure itself and its balance sheet. The process has already begun following approval from the UK High Court last month. However, the final decision won’t be made until 19 May.
Besides this, the management team is also actively seeking to sell the entire business. In fact, it had previously received a formal offer of 20.9p per share last year. This has yet to materialise into a finalised and signed deal. But if it were to go through, or another similar offer is made, then based on the Amigo share price today, it could represent a potential return of around 30%.
The bottom line
The business looks like it’s taking the rights steps to turn itself around. However, this process is likely going to take several years, even with the most optimistic outcomes. Therefore, I’m sceptical that the Amigo share price is going to recover in 2021.
Over the long term, perhaps a recovery will eventually take place, assuming it doesn’t get acquired. But at this stage, I see an exceptionally high level of risk attached to this business. Even the management team acknowledged this by stating that if it fails to acquire the Scheme of Arrangement, the company will likely go bankrupt. Therefore I won’t be adding any of the shares to my portfolio today.
