© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Hello, everyone, and welcome to the Amigo Holdings PLC Third Quarter Results. My name is Bruno and I'll be operating the call today. [Operator Instructions] I will now hand over to your host, Danny Malone, CEO. Please go ahead.
Good morning, and thank you for joining us for Amigo Holdings PLC's third quarter results for the 9 months to 31st of December 2022. I am Danny Malone, Amigo's Chief Executive Officer. And with me today is Kerry Penfold, our Chief Financial Officer. In a moment, I'll give a summary of the business and financial headlines for the period. Kerry will then take you through the numbers before I talk in more detail on our investment proposition, the lending pilot and the proposed capital raise. Following the presentation, we will open the call to questions.
Let's first move to Slide 5 and look at the business headlines. The first 9 months saw good progress in many areas. During the last quarter, in October, we met the first Scheme condition with our return to lending under the pilot program. The pilot was extended in January 2023 and is ongoing with third-party outcomes testing also having started in January. We'll go into more detail on this later. In November, the Scheme closed to new claimants. The final number of complaints received was around 210,000. This is down a little on our half year assumptions but significantly ahead of initial projections made at the outset of this process. Post period end, we were grateful to the FCA for concluding their investigation into Amigo's past practices and recognizing that any financial penalty would impact our ability to redress Scheme creditors. Whilst the penalty was therefore reduced to 0, the estimate of the amount of redress we will pay to past customers is in excess of GBP 300 million. We now face the challenge of raising equity to support both our Scheme obligations and future growth. This has been more difficult than we anticipated, partly due to the deteriorating market conditions and investor caution. If the Board do not expect the capital raise to be successful, it is legally bound to invoke the fallback solution. To date, we have secured nonbinding indicative interest of between GBP 20 million and GBP 25 million. That comprises between GBP 10 million to GBP 15 million equity and GBP 10 million of exchangeable notes. Turning to the financial headlines on Slide 6. The back book continues to run off with the net loan book reducing by 66% to GBP 61.2 million and revenue down 76% to just under GBP 18 million. The reported loss before tax of GBP 21.3 million reflects both the lower revenue and an upward revision of the estimated uphold rate within the Scheme with the complaints charge to the income statement of GBP 15.9 million. Unrestricted cash remained strong at GBP 140.9 million as at the 31st of December 2022. Current unrestricted cash is over GBP 105 million, after paying GBP 37 million into the Scheme fund on the 21st of February 2023. Net assets were just under GBP 27 million at 31st of December. As we have said before, all net cash and net assets by our small working capital amount are committed under the Scheme.
I will now hand over to Kerry, who will go through the numbers in more detail.
Thank you, Danny. Good morning. If we look first at the P&L on Slide 8, we can see our reported loss before tax of GBP 21.3 million incurred in the period. The key contributor to the loss reported today is the complaints charge of GBP 15.9 million. This relates to the change since the half year in the estimated uphold rate, and I will go into this in more detail shortly. Adjusting for this, we saw a loss of GBP 5.5 million. Elsewhere in the income statement, as Danny has said, revenue declined by 76.5% to GBP 17.8 million. This is primarily due to the continued amortization of the book. In addition, since Scheme sanction, we have not recognized the portion of interest which we estimate will be repayable to claimants. Finance costs have reduced to just GBP 2.1 million. That is down 85.3% year-on-year due to the redemption of a significant portion of our senior secured notes and the paydown of our securitization facility. We have seen an impairment credit in the period as we continue to collect from previously charged-off loans. Given the maturity of active loans within the gross loan book, these are now largely provided for under the lifetime loss assumptions. The increase in operating expenses in the first 9 months is largely due to the investment made in the development of our new product range. Turning to Slide 9 which shows the breakdown of our balance sheet. The group had net assets at the end of December '22 of GBP 26.6 million. As Danny has said, substantially all the shareholders' equity will be absorbed by the ongoing costs associated with collecting out the back book and operating the Scheme. The reduction in complaints provision year-on-year reflects the sanctioning of the Scheme in the period, which has capped cash liability for redress creditors. You can see from the slide that funding has reduced over the period to just GBP 50 million of remaining bonds. This, together with the payment of the first Scheme contribution in June '22, resulted in lower unrestricted cash than a year ago at GBP 140.9 million. The second Scheme contribution of GBP 37 million was paid to the Scheme fund post period end on 21st of February. Despite the worsening macroeconomic backdrop, our overall cash position remains strong and collections resilience at this point, which will be demonstrated later in his presentation. Let's turn now to Slide 10 and look at the complaints provision in more detail. Year-on-year, the provision has almost halved due to the sanctioning of the Scheme and the reduction of liability that this implies. The slide here shows the increase from full year provision of GBP 179.8 million to GBP 192.8 million at Q3. The expected liability has increased materially since our estimate in March '22, owing to the increase in claimants under the Scheme to circa 210,000. The expected uphold rate has also been revised upwards to a blended 80% based on observed decisioning for claims process so far. Both increased claims volumes and higher uphold expectations increased the levels of expected balance adjustments on the gross loan book, which will be adjusted in full.
In total, the estimated amount of redress we will pay to past customers is over GBP 300 million. The number is greater than the provision set aside for complaints as the large amount pertains to loans already in charge-off. A further implication relevant for our Scheme cash claimants is that the pence and the pound to be received by individuals is expected to be lower with the cash pot spread amongst a higher number of claimants. We note that with a large number of claims still to be reviewed, this can only be an estimate and the final outcome is, of course, subject to change. Slide 11 shows our positive cash flow position. A positive net cash flow in the period of GBP 70.1 million resulted in a closing cash position of GBP 211.2 million at the end of December '22, but I should note this number includes restricted cash. My final, Slide 12 shows our net cash position and funding structure. The group is financed from a combination of cash generated from operations and senior secured notes of GBP 50 million. GBP 184 million of the senior secured notes were redeemed in January '22. The remaining secured notes are due for repayment in January '24. However, the Board believes reducing interest payments while the new product scales up would be a more efficient use of capital and have, therefore, taken the decision to repay the remaining senior secured notes early. The repayment is expected to be completed in the coming weeks following the finalization of certain procedural matters. The holders of the senior secured notes will receive formal notice of the early redemption in accordance with the terms and conditions of those notes. If the capital raise is successful, this funding will be replaced in May by longer-term debt facilities. The group has secured term sheets for debt facilities which I believe are capable of execution following further discussions with lenders. As we do not require the funding provided by the senior secured notes ahead of the capital raise, we are therefore taking action to repay the notes now, which will save both interest and operational cost. With that, thank you, and I will now hand back to Danny.
Thanks, Kerry. I'd like to use the remaining time before we open the questions to outline our investment proposition, give a little more detail on pilot lending and on the proposed capital raise. Before I do, I would like to state that as a Board, we are grateful for our shareholders' continued support and patience. We recognized the significant loss of value over the last 3 years and are doing what we can to secure the funding we need to take the business forward. Slide 14 lays out the key elements of the investment case for Amigo. With the FCA enforcement action now concluded and the Scheme now addressing all potential claims from past customers, the business can move forward with limited legacy risk. With the net assets in the legacy loan book committed to the Scheme, we are effectively a start-up proposition, but one with systems and experienced people already in place. The growth capital we require will be used to fund the initial J curve that you would expect to see with any startup, but it is expected to be a shallower J curve because of the established position we are starting from.
There is a significant and growing need for our products. With many businesses in our sector having been forced to exit, there is huge demand and a significant social need for regulated responsible credit in the mid-cost space. We have built our new products with the new FCA consumer duty in mind and with the benefit of the considerable learnings from the past. As such, the business model is set up for the future regulatory environment. As you can see from the graphics on the slide, after an expected initial period of losses, we are projecting substantial revenue and EBIT growth to March 2027 of an excess of GBP 100 million revenue and over GBP 60 million EBIT, a compound average growth rate of 50% and 225%, respectively. Moving to Slide 15 and pilot lending. Amigo returned to lending in October after receiving approval from the FCA to do so under certain conditions, including certain volume limits. We are pleased to have seen strong demand throughout the testing phase, which has been really encouraging, and we've made changes along the way to improve both customer journey and conversion. We have lowered the solo starting APR, so that it is now at 39.9%. Volumes of loans written were very low in the first 2 months, largely due to our focus on testing and refining our new technology and processes, but also due to the cautious approach we are taking to underwriting given the current cost of living challenges and the impact this is having on affordability. The pilot was therefore extended in January to enable us to generate the volumes required for third-party testing to begin, which it now has. Volumes of new loans have increased substantially over January and February. And in the current run rate, monthly originations are in excess of GBP 1 million and expected to continue to grow. Delinquency is currently 0, reflecting not only the early stages of growth but also the quality of the portfolio. Applications are coming to us via both direct channels, that is our new RewardRate website, paid media and social media strategies, and through introducers or brokers. The latter have originated the vast majority of loans so far. The solo product has made up the significant majority of total loans underwritten. The use of introducers and prequalification enables better targeting of customers. If the pilot is successful, originations are expected to reach GBP 150 million a year by the end of year 2 and growth to over GBP 250 million in year 4. Returning to lending. In October, we met the Scheme condition of returning to lending before 26th of February 2023. Let's turn now to Slide 16 and the capital raise. Amigo is looking to raise capital to both satisfy the final Scheme condition and to provide growth capital for the future business. The Board is seeking investor backing to underwrite a capital raise of GBP 15 million to fulfill our Scheme commitment plus GBP 30 million to support the ongoing business. This will include a preemptive offer to existing shareholders. So far, we have received nonbinding indicative interest of between GBP 20 million and GBP 25 million. This consists of GBP 10 million to GBP 15 million in equity from a combination of potential investors and individual existing shareholders, plus GBP 10 million of exchangeable notes, that is debt that convert -- that can convert to equity. We have also received term sheets for the debt facilities required. In terms of structure, this has not been confirmed yet and needs to fit within the profile of the ultimate underwriters of the capital raise. The 19:1 is mandated by the Scheme and will be a part of the final structure that will be put to shareholders. Finally, on this slide, what are the next steps? We now need to convert the potential interest to binding offers and secure offers for the remaining shortfall. We then need to issue a prospectus and call a general meeting, at which shareholders will be asked to vote for the capital raise to proceed. A positive vote of greater than 75% of shareholders who vote is required. The Scheme deadline is 26th of May 2023. If the raise is not successful, then the Scheme will switch to the fallback solution, which is an orderly wind down of the business. In this situation, there would be no value attributed to the company's ordinary shares. Let me finish now with the summary and outlook on page -- sorry, on Slide 17. We made progress over the first 9 months of the year, but we now face a challenge to secure the equity funding. The pilot lending phase is continuing. We are continuously applying the findings from the pilot and originations are expected to grow substantially from here. The FCA enforcement action has concluded. The learnings have been embedded into our new products, processes and culture, and we are well positioned for the future regulatory environment and to meet the growing demand for mid-cost credit. As I said earlier, as a Board, we are grateful for our shareholders' continued support and patience. We have a strong belief in the business, but we can only take it forward if we can secure the equity funding. The Board is exploring all options to achieve the best outcome possible for all our stakeholders and to rebuild a strong business for all. Thank you for listening. I will now pass you back to the operator to open the call to questions.
[Operator Instructions] At this moment, we have no current questions. So I will hand over to Kate Patrick to take any webcast questions first. Please go ahead.
Thank you, Bruno. Yes, we do have a few questions coming on the webcast. First question is on the pilot testing. Has the FCA screening on pilot testing still -- is it still ongoing? Or have they been completed?
It is still ongoing. We can't give a definitive timeline for it because we can't be sure what the FCA would say when the report is submitted. But we are expecting it to conclude in the next few months, but we cannot be definite about that.
Thank you. I've got a couple of questions on the capital raise. First one coming in is, when will we know more detail of the structure?
As soon as we can. As we've said, it will depend on who the underwriters are and what their preference is. There's a wide variety of preferences based on people that we've spoken to today, including people still in the process and people who have dropped out of the process. So until we have all of the underwriting in place, we can't be definitive about that yet.
Second question on the capital raise. Is the GBP 10 million to GBP 15 million of interest enough for the capital raise? How does the GBP 10 million notes work in regards to the equity raise? And are you still looking for the GBP 45 million in total?
Okay. I'll answer those in reverse. Yes, we still need the full GBP 45 million. The initial GBP 15 million will go straight out into the Scheme. The company needs the remaining funds to pass threshold conditions for the FCA. We must have sufficient capital to sustain the business for the initial period of time, otherwise we won't have a regulatory license. So we cannot continue without that funds in place. So that's why we need the whole amount, not just part of it. In terms of the notes, the notes count towards the equity raise. So the GBP 45 million effectively reduces to GBP 35 million of other equity as a result of those notes. And is the GBP 10 million to GBP 15 million of interest enough? Currently, no. We need to fill the remaining gap. Obviously, there will be an expectation that a certain amount will be raised from a rights issue. We don't know exactly what that will be at this stage. We've had some advice of what it's likely to be, but the gap needs to close.
Thank you. And one question on lending and current conversion rate and what is your target conversion rate? And do you need to hit your target conversion rate in order to get to your GBP 60 million EBIT?
I'm not going to go into details of conversion rates. They're improving on a weekly basis. They started off on a very low level. They have improved and there's a lot of growth still to come.
Thank you. That is -- I believe, that is all the questions that we have on the webcast at this time. And so I hand it back to you, Danny.
Okay. Thank you, everyone. Take you for your continued interest and for your patience. And I hand you back to the operator.
Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.