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As the Amigo share price soars, is it too late for me to buy?

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·3-min read
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The Amigo (LSE: AMGO) share price has performed excellently in 2021 so far, rising by over 200%. Such a strong performance has been driven by more shareholder optimism. Nonetheless, as a subprime lender, Amigo is extremely exposed to risk. This has been made worse by customer complaints and worries over the company’s liquidity. Its current price of 26.5p is therefore still a long way off its 2019 price of 270p. As such, is there a chance that the stock can claw back more of these losses, or has the 2021 share price rise now come to an end?

The subprime lending industry

As a subprime lender, Amigo lends to customers with very poor credit histories who cannot borrow from a traditional bank. Although these loans generate large amounts of interest, defaults are also common. This means that the guarantors often have to pay off the loans, and this has led to a large number of consumer complaints.

Coronavirus has also had a negative impact on the subprime lending industry and the Amigo share price. Indeed, as of January this year, Covid-19-related payment holidays had been granted to over 63,000 customers. As the company only had 156,000 customers at the end of 2020, it is evident that the pandemic has had a severe impact on a large number of Amigo customers. This also led to a pause on all new lending until 2021, resulting in decreased revenues.

Furthermore, it has recently been reported that another major name in the sector, Provident, is getting rid of its subprime lending arm. Although this may reduce competition for Amigo, it shows that subprime lending is not a healthy industry right now.

Consumer complaints and scheme of arrangement

Amigo has also been inundated with mis-selling claims after customers accused the firm of failing to carry out basic financial checks. Unfortunately for the company, the financial ombudsman has found in favour of the customers in the majority of cases. This has led to it applying for a scheme of arrangement. This plans to cap compensation payments to a maximum £35m and 15% of profits over the next four years. News that the FCA would not oppose the deal has also seen the Amigo share price rise rapidly.

Implementing this scheme of arrangement is vital for Amigo’s survival. Indeed, management has warned that without the scheme of arrangement, it will have to file for administration. Such a result would be catastrophic for shareholders, who could be left with absolutely nothing.

Has the Amigo share price got further to rise?

Fortunately, it seems that the scheme of arrangement is likely to be implemented and this should benefit Amigo greatly. Furthermore, new management also seems keen to “get Amigo back to life again”. Recent insider buying from the CEO and the CFO has perhaps given reason for optimism on this front. It shows that management believes the Amigo share price has further to rise.

Nonetheless, I’m not convinced that the Amigo share price will be able to rise much further. The subprime lending industry is evidently struggling and there is the chance that the company will have to file for administration. This makes Amigo shares too risky for me.

The post As the Amigo share price soars, is it too late for me to buy? appeared first on The Motley Fool UK.

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Stuart Blair 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.

Motley Fool UK 2021

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