Lacking a unique angle

The first is CAB Payments (LSE:CABP). The stock is down 45% over the past year, after a large crash hit the share price almost a year back.

Late last year, the stock fell over 70% in a day after the business issued a warning on financials. The global payments provider revised revenue expectations lower, flagging up that “market conditions are compressing margins and reducing trading volume”.

If we fast forward to the H1 results that came out last month, the situation doesn’t seem to have improved much. Adjusted earnings came in at £18.7m, lower than the £40m from the same period in 2023. The company noted “lower revenue and higher operating expenses”.

I just don’t see how the payments firm is really unique in what it offers. Granted, it might be able to carve out a niche in facilitating payments in emerging markets. This could help the business to grow in the future. But in my view there are plenty of hurdles it needs to get over before I’d consider investing.

Falling production levels

Another company I’m concerned about is Ferrexpo (LSE:FXPO). The stock has fallen by 41% over the last year and is down 85% over the past three.

This is a sad case, as the Ukraine-based iron ore pellet producer has seen production levels fall through the floor since the invasion by Russia. In the latest quarterly report, it noted how only one to two pelletising lines out of four were operational during the period. Further, it has almost 700 employees currently serving in the military, again putting pressure on production capacity.

I am hopeful that the war will come to a peaceful end at some point. However, I don’t see any imminent signs of this. Therefore, I anticipate that Ferrexpo will continue to struggle, with production and revenue likely falling further in the coming year.

It also hasn’t been helped by the price decrease of iron ore. At the start of this year it was trading at $133 per ton, but now it’s at $105. This means that whatever is produced by Ferrexpo ultimately is being sold for a lower price than it could previously get on the open market.

I could be wrong here and if we get a surprise peace deal then Ferrexpo shares could rally sharply on the good news. Operating levels could jump materially in a very short period of time, helping to lift revenue. Yet I’m happy to sit this one out.

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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.

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