Bad rates: CAB Payments "disaster" erases little faith left in IPOs 30 Oct 2023

Data InsightECM Pulse 30 October

Bad rates: CAB Payments "disaster" erases little faith left in IPOs 30 Oct 2023

In a year mired by bad IPO news, one of the latest debutants just worsened the mood music. CAB Payments, the UK-listed fintech company is trading 84.5% below its IPO price following a profit warning earlier last week.

The stock was on the back foot anyway, trading down after pricing. It is now, by far, the worst performing European IPO of the year.

The situation is a “disaster” for a European IPO market that was already on its knees, an ECM investor and an ECM banker agreed.

Far from the first time a newly listed company misses numbers, CAB joined Aston Martin, and Finablr, in the disappointing feat, the ECM investor noted, adding such incidents make it difficult to support recent arguments to change UK investing rules so that pension funds can invest in IPOs.

While all sources speaking to ECM Pulse agreed that CAB’s fall was a serious impediment for IPOs, some felt the reaction in the share price was also reflective of wider market issues. “The most interesting thing at the moment is just how unforgiving the market is,” said a second ECM banker. “Obviously it is not a good look for the IPO market, and investors are right to be angry, but I think a lot of the move was part of the general trend we are seeing and it is always worse with an illiquid IPO,” he added.

Currency woes

IPO investors depend on the guidance and risk factors laid out in the prospectus, but there are concerns that risk highlights are too generic.

“A dispersed group of fund managers are at an information disadvantage vis-à-vis insiders, and so the IPO market requires gatekeepers to vet the suitability of companies for a public listing,” said Craig Coben, former global head of equity capital markets at Bank of America. “One problem is that the prospectuses are full of verbose, generic risk factors that are so general as to leave investors unable to make an informed investment decision.”

The company’s revised financial guidance was attributed to “a number of changes to the market conditions in some of its key currency corridors, on top of the ongoing uncertainties surrounding the Naira, which are impacting both volumes and margins; most notably, the Central African franc (XAF) and West African franc (XOF),” according to the company.

Business in both currencies, the second and third most important for CAB contributing to around 18% of its revenues over 9M23, has been affected by central banks forcing currency flows to local institutions rather than through international intermediaries, such as CAB, hammering revenues.

The company revealed in its IPO prospectus that there were already currency risks around the Nigerian Naira (NGN), its most important currency corridor. “While all profit warnings are unexpected by definition, CAB Payments’ warning so soon after the IPO has raised question marks over management’s credibility and the visibility of underlying revenues,” said Liberum analyst Nick Anderson on a note on October 25.

Chris Ennals, IPO consultant and former ECM Managing Director at Credit Suisse, noted also that "sudden regulatory changes and market readjustments are always a risk when operating in emerging markets, so providing forward guidance at IPO on items such as topline growth and margins requires careful treatment."

Two ECM investors bemoaned that a company having to issue a profit warning so quickly after IPO, made them question the due diligence done by CAB’s IPO advisors pre-launch.

Disclosure debate

CAB noted in its IPO risk disclosure that central banks “have in the past and could in the future introduce measures to protect their currency and economy, which might make it more difficult for the Group to source and provide products and services in such currencies, or otherwise have an adverse effect on the Group's business in respect of those markets.”

Three sources close to the IPO reiterated that the language in the prospectus meant that investors were warned about possible regulatory risk and that the move by the two central banks was recent and a shock.

“It’s unfortunate CAB had to come out and issue the profit warning, but it is in the disclosure that there is a lot of risk in the region,” said one. “Nobody expected this, as you can see the original IPO guidance was reiterated a month back with the half year results; things soured very quickly.”

But some feel the language was not specific enough to adequately warn investors of the specific risk.

“If you read the Risk Factors of the CAB Payments IPO prospectus it is not apparent whether an investor could have reasonably foreseen these central bank interventions as a risk,” said Coben. “The main risks should be explained clearly specifically and upfront. There is too much boilerplate and too much padded prose.”

One of the investors felt that if the company was exposed to so much regional volatility, then there is an argument it should not have been brought to the IPO market in the first place.

Both ECM Bankers agreed, adding that with the huge EM risk CAB was evidently exposed to, it might have been more suited to a sale rather than an IPO.

For CAB Payments and its investors, the price move is hugely difficult, but unfortunately it is also likely to have a wider effect on other IPOs as trust in the product is battered further.

CAB Payments declined to comment.

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