Weekly Market Commentary | 31/10/23 | CABP, OMG, IPF | CAB crash

As two more bids come in for small-cap listed companies, and another Private Equity IPO disappoints, Bruce looks at the trends that are shrinking public stock markets. Companies covered: CABP, OMG, IPF.

The FTSE 100 was down -1.5% to 7,291 last week. The Nasdaq100 was down -2.6% and the S&P500 was down -2.5%. US tech stocks were reporting last week and Alphabet fell -10% following disappointing Q3 results and was also off Meta -3.9% after warning about a weak advertising market. The US 10Y bond yield fell back below 5% to 4.84%.

Aside from the tech/advertising sectors, the Q3 earning season seems to be showing that corporate profits are healthier in the US than in Europe. 78% of US companies reporting thus far beat Q3 consensus, compared with 57% of companies in Europe.  US Q3 GDP figures came in at +4.9% annualised which is also remarkably strong.

I mentioned last week that we were seeing a lot of bids coming in for smaller UK companies. Add to that two more: last week SCS, the cash-rich furniture retailer which saw a bid from a Spanish company, Poltronesofà, an Italian furniture company with 167 stores in Italy, 106 in France and 27 across the rest of Europe. They are paying a +66% premium to the undisturbed closing price. As of 29 July, SCS had £69m of cash so 75% of the bid value is cash held on SCS’s balance sheet. There was also a bid for FireAngel, the smoke alarm company, at 7.4p, a huge 252% premium to the undisturbed price (although the share price was 11p back in April of this year).

There’s an interesting Merryn Talks Money interview with Duncan Lamont of Schroders who points out there’s been a -60% reduction in UK-listed companies since 1996 (2,700 to 1077). Going further back there’s been a -75% reduction since the 1960’s. Most of the fall is driven by bids from foreign buyers and Private Equity. This is not just the UK, it is a global trend. German listed companies are down by -40% since 2007 and even US listed companies have fallen by -40% since the mid 1990’s, as this chart from Schroders shows.

Meanwhile, the companies leaving the stockmarket are not being replaced at the same pace by new listings and IPOs. Private equity has grown from a $500-600 billion industry in the early 2000s to be worth more than $7.5 trillion in 2022, according to Schroders.

IPOs from Private Equity are often overpriced and perform badly in the aftermarket. This week I look at CAB Payments, which has warned on profits (share price down -60% last week) after listing in July. Out of curiosity, I applied my AIM filter of the recent IPO which I wrote about in June, to see if listing on the FTSE All Share (ie the Main Market) had fared any better. Sadly not. 9 of 18 recent Main Market IPOs are down more than -50%, and only 2 (Haleon, which was a spin-out from Glaxo and Baltic Classified) are in positive territory.

This week, I look at Oxford Metric’s and International Personal Finance’s trading updates. Unlike CABP both of these were encouraging, though YTD OMG is off -20% while IPF is up +75% YTD.

CAB Payments profit warning

Yet another disappointing IPO, with CAB Payments saying last week that in recent weeks trading in African currencies (Nigerian Naira, but also Central African franc and West African franc) are compressing trading volumes and margins. That seems odd, normally you would expect margins to widen in the face of declining volumes in currency markets. CABP are reducing revenue guidance by 17% versus previous expectations, though this still represents 20% y-o-y growth from £109m FY Dec 2020.

That implies that the FY revenue for Dec 2023F will be around £130m, or a £32m reduction in revenue in absolute terms. At the PBT line, Sharepad shows PBT of £56m (a -22% reduction from the £72m previous forecast).

History: The company’s history goes back to 1883, when the group’s former parent company, Crown Agents Bank was founded, operating as the bank for the British Government. This history and their banking licence meant they have a trusted relationship with Central Banks around the world, particularly emerging markets. The Group has 218 liquidity providers (ie local banks), including 25 Central Bank relationships and operates across 150 countries. This network removes friction from traditional payment rails (ie SWIFT) in order to send money directly from A to B (or A to F in the graphic below).

In 2016, Helios Investment Partners, an African-focused Private Equity firm, bought the group and in July sold down their holding from 72% to 41% following the IPO. This was a premium listing on the main market, rather than AIM. The offer price was 335p per share, raising £300m and giving the group a market cap on admission of £851m. The first day of trading went badly with the shares falling about 10%, and the shares are now down -86% from their IPO price four months ago.

Valuation: The shares are now trading on 2.3x PER FY Dec 2024F dropping below 2x PER the following year. That suggests investors are sceptical that even the downgraded earnings are achievable. Emerging market currencies ought to be a growth area with a large addressable market as the chart from the company below shows.

On the 13th September on the analyst call Bhairav Trivedi, the CEO, said: “So again, to reiterate on the medium-term outlook, again, we are very confident of delivering our financial year ’23 numbers, and we continue to remain confident on our medium-term outlook.” So, management have lost significant credibility given that less than two months ago the CEO was “very confident” in FY 2023F numbers. Forex and payments is a sector where things can go wrong very quickly. Argentex shares were down -30% last week after they announced Chief Exec Harry Adams would leave with immediate effect. He was not thanked. Both CABP and AGFX could have been much clearer in their RNS’s what has gone wrong.

Opinion: CABP is another disappointing Private Equity IPO. The Naira had already devalued in June before the company’s IPO and that was already in the FY Dec 2023F forecasts.

One suggestion, reported by Bloomberg, is that African Central Banks have demanded local West Africa corporates transact through local banks, rather than CAB Payments. The implication is that much of CAB Payments’ growth and high margins derived from trading offshore in African currencies subject to exchange controls, according to this FT Alphaville article. So Central Banks have torpedoed CABP’s business model, which has crushed volumes and margins. None of that is made clear in the RNS though. There are certainly several bookrunners (Barclays, JP Morgan, Liberum, Peel Hunt) who should feel embarrassed.

Oxford Metrics FY Sept Trading Update

I wrote last week that forced selling by professional fund managers might be causing recent unusual share price performance, and this could create an opportunity for amateur investors who don’t need to worry about outflows. Oxford Metrics, the smart sensor business, which reported last week strikes me as a good example of this. The shares are down -28% from their peak in June, for no obvious reason.

Last week they announced FY Sept revenues would be up +57% to £44m, and adj PBT of £6.3m up 2.5x. Those figures are also 13% ahead of consensus on the revenue line and 9% ahead on the profit line. The company has £65m of net cash, having sold Yotta, their infrastructure management business for £52m. They say that H1 March performance was their strongest ever and momentum continued into H2 driven by Engineering and Life Sciences segments. In July they announced a new CEO, Imogen Moorhouse, who has been at the company for 22 years and has been running Vicon, the core business, since 2012.

Valuation: Progressive have left their forecasts unchanged, perhaps indicating that there was an exceptional nature to these positives, and implying revenue might fall in FY Sept 2024F. That puts the shares on a PER of 19x FY Sept 2024F. Cash represents 58% of the market cap, so adjusting for cash the PER falls to high single digits.

Opinion: Looks good. I’m flagging this as an example of a company reporting good results, with a rock-solid balance sheet that has still been sold off in the market rout of the last few months. Another example could be CML Microsystems, which is down -38% from its peak, despite having £22m of net cash in March and continuing to report good results. Some of that cash will be spent on their US acquisition, but the share price move looks anomalous. Premier Miton and Liontrust are on the CML shareholder register, and the former has been reducing its position. So, I’m flagging both CML and OMG as being an opportunity to take the other side of possible institutional selling. I own both already.

International Personal Finance Q3 Sept Trading Update

This unsecured consumer credit business with operations in Eastern Europe and Mexico reported customer receivables (ie loans) up +4% y-o-y to £875m. That is despite a -17 % y-o-y decline in Poland, as the government introduced a cap on the Total Cost of Credit (TCC) and affordability requirements, which came into force on December last year and May this year respectively. Poland’s TCC legislation reduced the maximum non-interest fees that can be charged on a loan to 45% of the loan value, down from 100% previously. IPF responded by going into credit cards and they have now issued over 100,000 cards.

Excluding Poland customer receivables were up +15%, which I think is encouraging given the resurgence of food and energy price inflation has hit IPF’s customers hardest. The group’s revenue yield (ie how much it earns on receivables) was up 4 percentage points to 55%. That uplift in revenue helped the cost/income ratio fall to 57% (previously 64%). The group’s bad debt charge was 12.0% at the end of September (September 2022: 8.5%) which management said was inline with their expectations.

The business is split into three divisions: i) The largest is European Home Credit, 54% of net customer receivables, growing at +2% a year; ii) Mexico Home Credit, 21% of receivables growing at +8% a year; iii) IPF Digital, which operates the Creditea, Credit24 and hapipozycki brands across 8 countries. This is growing at +7% a year. Within those divisions, there’s a wide dispersion of growth across different countries, as the table below shows.

Outlook: Sounds in line. They say performance 9M 2023, together with a robust balance sheet and funding position, gives them confidence in FY Dec performance and provides the foundation for delivering further strong growth in 2024.

Valuation: Despite rising +74% YTD, the shares are on a low PER 6.1x FY Dec 2024F, dropping to below 5x the following year. The forecast dividend yield is 8.9% and the cover is 1.8x. That low valuation is likely a mix of regulatory risk (the EU Commission’s review of the second Consumer Credit Directive (CCD II) is will be published in November) and the customer demographic which is particularly sensitive to the cost of living crisis. Worth noting that revenues have declined by -26% since FY Dec 2018 and the business made a loss in 2020.

Opinion: During the financial crisis IPF fell -78% peak to trough, so I would be wary of the low PER ratio. The YTD share price performance does show a lot of bad news is in the price though, and this ought to be a business that can generate 15-20% returns through the cycle while growing at above the rate of inflation. I feel a little uncomfortable investing in this sector, however, companies like Provident Financial and IPF argue that if they were not making credit available to customers who are too risky for banks, then the gap would likely be filled by less regulated loan sharks.


Bruce owns shares in Oxford Metrics and CML Microsystems

Bruce co-hosts the Investors’ Roundtable Podcast with Roland Head, Mark Simpson and Maynard Paton. To listen you can sign up here: privateinvestors.supercast.com

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This article is for educational purposes only. It is not a recommendation to buy or sell shares or other investments. Do your own research before buying or selling any investment or seek professional financial advice.