Investing in Africa can be fraught with political risk. Still, investors in CAB Payments Holdings (LSE: CABP) got a very nasty shock today (24 October) when the company updated the market on trading. Movements in a variety of African currency exchange rates led the payments and forex specialist to issue a profits warning. As I write, the CAB payments share price has plunged over 70% and hit a new 52-week low at one point Tuesday morning.
Is that an overreaction that presents a buying opportunity? Or could things go from bad to worse?
Tough times in frontier markets
The profit warning seems a bit sudden, given that the firm announced half-year results just last month. At that point it talked of “confidence both in the short-term outlook and the prospects for medium-term growth”.
Then again, the business specialises in what it terms “hard-to-reach markets”. Such frontier markets can be volatile.
Take Nigeria as an example. Its currency has hit record lows against the US dollar on the local black market recently. A shortage of US dollars reflects the fact that people have been urgently trying to convert their cash into harder currency.
But it is not only in Nigeria that CAB’s business has seen changes reducing both transaction volumes and profitability. In the profit warning, it also mentioned the Central African franc and West African franc.
Although CAB still expects year-on-year revenue growth to be around 20%, that is 17% lower than its previous outlook.
Things could get worse from here depending on what happens next to key African exchange rates. With the global economy looking increasingly fragile, I would not be surprised to see more deterioration in economic performance in west and central Africa.
Is a 70% fall overdone?
While the profit warning unsettled the City, the reaction seems dramatic. After all, CAB said it remains on track for impressive revenue growth for the full year. It emphasised that it expects strong growth over the medium- to long-term.
In the first half, CAB made a profit of £15m. After a 70% fall, its market capitalisation is just 10 times that.
With a growing business in markets that still look set for long-term development, I think the current CAB Payments share price could be seen as a bargain.
Why I’m not tempted to buy the shares
Despite that, I will not be touching the company with a bargepole. After all, it is only a few months since it listed.
Today’s profit warning coming a matter of weeks after the upbeat outlook of the half-year results raises questions of management capability, in my view.
Operating in markets with high political risk can throw sudden significant obstacles in the way of doing business. CAB has no control over such events and they could damage its business badly.
I do think the CAB Payments share price could bounce back in coming years if the African currency markets stabilise, company profits grow and management can inspire confidence from investors.
For now though, the risks feel far bigger than I am comfortable with.
