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Investing in Africa can be fraught with political risks. Even so, investors in CAB Payment Shares (LSE: CABP) received a very unpleasant surprise today (24 October) when the company updated the market on trading. Moves in a range of African currency exchange rates prompted the payments and foreign exchange specialist to issue a profit warning. As I write, CAB Payments’ share price has plummeted more than 70% and hit a new 52-week low at one point Tuesday morning.
Is this an overreaction that presents a buying opportunity? Or could things go from bad to worse?
Difficult times in border markets
The earnings warning seems a bit sudden, given that the company announced its half-year results last month. At that time there was talk of “confidence in both the short-term outlook and medium-term growth prospects”.
On the other hand, the company specializes in what it calls “difficult to access markets”. These frontier markets can be volatile.
Take Nigeria as an example. Its currency has recently hit record lows against the US dollar on the local black market. The shortage of US dollars reflects the fact that people have been urgently trying to convert their cash into stronger currency.
But it is not only in Nigeria that CAB’s business has undergone changes that have reduced both transaction volumes and profitability. In the profit warning, it also mentioned the Central African Franc and the West African Franc.
Although CAB still expects year-over-year revenue growth to be around 20%, that’s down 17% from its previous outlook.
Things could get worse from here depending on what happens with major African exchange rates. As the global economy appears increasingly fragile, I would not be surprised to see a further deterioration in economic performance in West and Central Africa.
Is a 70% drop exaggerated?
While the profit warning rattled the city, the reaction appears dramatic. After all, CAB said it remains on track to deliver impressive full-year revenue growth. He stressed that he expects strong growth in the medium and long term.
In the first half, CAB made a profit of £15 million. After a 70% drop, its market capitalization is only 10 times larger.
With a growing business in markets that still look poised for long-term development, I think CAB Payments’ current share price could be seen as a bargain.
Why am I not tempted to buy the shares?
Despite this, I will not touch the company with a barge. After all, it has only been a few months since it appeared on the list.
Today’s profit warning, which comes a few weeks after the optimistic outlook for the half-year results, raises, in my opinion, questions about management capacity.
Trading in markets with high political risk can create sudden and significant obstacles to the way you do business. CAB has no control over such events and they could seriously damage your business.
I believe the CAB Payments share price could recover in the coming years if African currency markets stabilize, company profits increase and management can inspire confidence in investors.
For now, though, the risks seem much higher than I’m comfortable with.
