4 September 2024

CAB Payments Holdings plc and its subsidiaries

("CAB Payments", the "Group" or the "Company")

Interim results for the six months ended 30 June 2024

Resilient business model, focus now on strategic execution

CAB Payments, a specialist in business-to-business cross-border payments and foreign exchange in hard-to-reach markets, announces its interim results for the six months ended 30 June 2024 and updated strategy.

Neeraj Kapur, Group CEO of CAB Payments commented:

"Our H1 results were resilient despite the exceptional prior year as set out in our trading update in July. Our outlook remains unchanged from our previous update and there was encouraging trading at the beginning of H2. We expect our Gross Income to be marginally below last year whilst we exhibit good growth across a broader range of currency corridors. I am particularly pleased with our recently announced strategic partnership with Visa which will significantly increase our payment reach and give us a more scalable solution to deliver a higher volume of payments.

"Importantly, we continued to deliver on our purpose, unlocking the prosperity of the global communities we serve by moving money when and where it's needed. Over the last twelve months we delivered approximately £3 billion of development aid and £8.5 billion of liquidity into low and middle-income countries.

"Today I am delighted to announce an updated, more execution focused strategy for the Group which builds upon its existing solid foundations and business model. We have already attracted some new world class talent from within the industry to help drive the business forward and who share our vision for the next phase of growth. We will be focusing on four areas: our network, our clients, our platform while continuing to invest and innovate. We will deliver a more diversified, sustainably growing business with strong operating leverage.

"I look forward to updating you on our strategic progress as we continue to execute our strategy over the medium term."

A renewed focus on strategic execution:

·      Delivering a diversified business with sustainable growth, through four key pillars:

1.   Network - Strengthen the breadth and depth of our network

2.   Clients - Deepen existing relationships, expand client base

3.   Platform - Leverage the banking licence to accelerate FX and payment volume growth

4.   Invest & innovate - Disciplined capital allocation to drive growth via technology and balance sheet management

·      Updated strategy driven by new senior leadership hires including Global Head of Sales, Head of Network, Head of Payments, Head of European Business Development and Chief Operating Officer, all with significant experience and track-record within the industry

H1 2024 financial highlights:

·      Resilient performance given elevated prior year performance, a lack of equivalent tailwinds in the current year and lower flows from International Developmental Organisations

·      Total Volume levels up 4% to £17.6 billion (H1 2023: £17.0 billion) - market-wide payment flows are down approximately 5% year-on-year in the Group's core Sub-Saharan Africa market and approximately 10% globally, based on the Company's analysis of market data

·      Gross Income down 22% to £55.7 million (H1 2023: £71.8 million)

o  Normalised performance - excluding the impact of previously identified dislocations in Nigerian Naira (NGN) and Central Bank interventions in Central African Franc (XAF) and West African Franc (XOF) - shows 11% growth in Gross Income and 12% growth in Transactional Income

·      Adjusted EBITDA of £18.7 million (H1 2023: £40.0 million) and Adjusted EBITDA margin of 34% (H1 2023: 56%) resulting from lower revenue and higher operating expenses (excluding D&A and strategic restructuring costs) which increased by approximately £5.5 million

·      Adjusted PAT of £11.0 million (H1 2023: £28.8 million) and Adjusted EPS of 4.3 pence (H1 2023: 11.3 pence)

·      Core Capital Expenditure as a proportion of Total Gross Income increased to 12% (H1 2022: 3%) as the business continued to invest for growth

·      Operating free cash flow of £9.4 million (H1 2023: £37.6 million) due to lower EBITDA performance compounded by higher Capital Expenditure in the period

·      Outlook:

o  Outlook unchanged from previous update in July: full-year Gross Income expected to be marginally below prior year with increased operating leverage in the second half, encouraging performance in July and August

o  Expect to incur approximately £15 million of Core Capital Expenditure for 2024 

Operating and commercial highlights:

·      New collaboration with Visa to integrate CAB's offering with Visa Direct giving the capability to deliver lower-value, higher volume payments in a cost-effective manner, providing reach to more than 8.5bn end-points across more than 190 countries

·      Authorisation from the relevant authorities to open a representative office in the USA remains on-track to occur in the second half

·      Successfully secured a payment service provider licence with De Nederlandsche Bank N.V. (DNB) allowing CAB to provide services across the European Economic Area

·      35 new clients onboarded and 526 active clients in total

Board change:

·      Mario Shiliashki, independent non-executive director of the Group, has resigned from the board to focus on his new role as Chief Executive Officer of myPOS, a London-based payment technology business. A recruitment process is underway to find a suitable replacement with the valuable experience and capabilities that Mario brought to the Group

Analyst and Institutional Investor Webcast:

A presentation webcast and live Q&A conference call for analysts and institutional investors will take place on 4^th September 2024 at 9.30 am UK time, a copy of the presentation will be made available on the Company's website at https://www.cabpayments.com/investors.

The presentation will be hosted by Neeraj Kapur, Group CEO and Richard Hallett, Group CFO

To register for the webcast, please go to:

https://secure.emincote.com/client/cab/2024interims

To register for the conference call, please go to:

https://secure.emincote.com/client/cab/2024interims/vip_connect

Retail Investor Webcast:

CAB Payments will also host a presentation for retail shareholders and prospective shareholders. This will be hosted via Investor Meet Company on 4^th September 2024 at 2.00pm UK Time.

Questions can be submitted via the platform any time during the live presentation.

Investors can sign up to Investor Meet Company for free and add to meet CAB Payments Holdings plc via: https://www.investormeetcompany.com/cab-payments-holdings-plc/register-investor

Investors who already follow CAB Payments Holdings plc on the Investor Meet Company platform will automatically be invited.

Selected Financial information and KPIs for Continued Operations:

Note:
(1) Excludes the Gross Income effect of the NGN, XAF and XOF Corridors

About CAB Payments:

CAB Payments Holdings PLC is the holding company for Crown Agents Bank (CAB), a UK-regulated FX and payments service provider, specialising in global FX and cross-border payments for hard-to-reach markets. 

Unlike traditional banks, CAB's unrivalled network, technology, and expertise means it can move money in the most complex situations, to the most challenging markets, for organisations that expect the most.

Trusted by Blue Chip organisations across the globe, CAB connects its clients to underserved geographies rapidly, consistently, and equitably so money can move efficiently to where it is needed. Offering a single API for all FX and cross-border payments, covering 140+ markets and currencies across 700+ currency pairs. Its extensive global network of partners allows CAB to offer competitive prices and fast, reliable settlement.

CAB is one of the first banks to achieve B Corporation™ status. The bank was awarded the Gold Sustainability Rating by EcoVadis in 2022 & 2023 - ranked within the top 94% of 94,000 companies assessed across 160 countries and over 200+ industries.

For further information, please contact:

Chief Executive Officer's Review

This is my first set of results since being confirmed as Group CEO of Crown Agents Bank ("CAB") and its listed holding company, CAB Payments Holdings plc (''CAB Payments'' or ''the Group''). Since joining the business, I have spent time meeting our people, getting to know our increasingly diversified client base, and forming my first impressions of the operations and business model. I've found that CAB Payments is an exciting group with a differentiated business model and a highly-rated and valued purpose and proposition: through our network, sustainably unlocking the prosperity of the global communities we serve by moving money when and where it's needed.

The Group has a structural part to play in ensuring liquidity is consistently and reliably being delivered to emerging markets, improving financial infrastructure and stimulating economic development. The statistics tell this story: Over the last twelve months, our network moved approximately £3.0 billion of development aid flows (H1 2024: £1.4 billion) and £8.5 billion of flows into low and lower-middle income countries (H1 2024: £4.3 billion), all of which are critical to promoting social stability and economic growth in the core geographies in which we operate. We are proud that CAB is one of the few UK-regulated banks to achieve Certified B Corporation status. This certification recognises our commitment to advancing sustainability across all aspects of our operations, with a particular focus on environmental impact, climate change, and responsible business practices. It reflects our ongoing efforts to improve and align with the highest standards of ethical conduct.

My aim is to make sure the Group takes advantage of the significant growth opportunities available to it through careful and judicious investment in our business, delivering on our purpose and driving value for all of our stakeholders.

Below, I outline four strategic pillars that will drive the Group's future growth, at the heart of which is creating an increasingly diversified - and therefore sustainable - revenue mix. We have already begun work on some of these, having identified levers we can pull to improve operational performance in the second half of this financial year.

H1 2024 performance summary

Whilst my position as Group CEO was only confirmed in June 2024, the Group has delivered a solid set of results for this half year. This performance should be viewed against the backdrop of a particularly strong first half of the prior year, which included material elevated income from trading in the Nigerian Naira (NGN), as previously disclosed.

In October 2023, the Group also disclosed that the business had experienced a compression in revenues in the second half due to central bank interventions in some of our core markets in particular the Central African Franc (XAF) and West African Franc (XOF). Therefore, we believe that 2024 is the first year since 2020 where the Group does not expect to benefit from any significant corridor-related tailwinds and this is evident in the first half performance.

It is also important to note that we believe there to have been an approximate 10% year-on-year drop in global cross-border flows and an approximate 5% drop in flows into Africa when comparing H1 2024 to H1 2023. We see this market contraction as short-term owing to a variety of factors, not least a strong dollar and global political volatility. However, we believe the underlying structural demand for FX flows and payments will continue to grow over the long-term in the markets in which we operate while also continuing to grow our market share as we did in the period.

There were a couple of industry-wide incidents in July, namely the global payments issue that affected the Bank of England's CHAPS service and the CrowdStrike update that caused widespread problems with Microsoft Windows.  Both events had minimal impact on the Group, our ability to continue trading and most importantly our clients. We detected the CrowdStrike incident early via our observability technology and managed it through our established incident management process working closely with internal teams and affected vendors. Whilst the impacts were minimal in line with our established practises, we are assessing our response procedures to incorporate any internal and external lessons learned from the global outage.  

Wholesale FX and Payments FX - good underlying growth and improving corridor diversity

Excluding the effects of NGN, XAF and XOF, our Wholesale FX and Payments FX revenue grew 14%, which is pleasing as the business leverages its well-established network to facilitate best execution for our clients to become a provider of choice. Our top 5 currency corridors accounted for just 32% of Gross Income in H1 2024 versus 49% in H1 2023. A key priority is to reduce the Group's level of currency concentration going forward, as we build and grow a more diversified business fit to deliver growth through the market cycle and navigate changes across the markets in which we operate.

On a reported basis, Gross Income from the core Wholesale FX and Payments FX business declined year on year by 38% from £48.2 million in H1 2023 to £29.8 million in H1 2024. Total volumes were up 4% versus the same period last year despite decreased activity from the three identified corridors which have persisted into 2024 and the broader decline in the payments market. Take rates declined from a blended 28 bps in H1 2023 to 17 bps in H1 2024 as a result of the unusually high Nigerian Naira take rates in the prior year period. This was as expected, as flagged in the Group's IPO materials.

Further, International Development Organisations (''IDOs''), who traditionally tend to transact more in the second half of the financial year, also demonstrated below trend volumes in the first half owing to changes in the political landscape among major donor governments (principally the US and Europe), that have seen aid budgets cut and those funds diverted to support domestic policies.  

In the period, we continued to expand our client base through onboarding 35 new clients (H1 2023: 41) while strengthening our network, increasing the number of partners to 237 (H1 2023: 205) and liquidity providers to 121 (H1 2023: 112). This speaks to the strength of the Group's proposition and its ability to deliver for diverse client needs. In the first half we have improved the client onboarding process, resulting in a shorter time frame between signing a client and a ramp up in their revenue-generating activity. Looking ahead, there is more to do to optimise the way our sales and network teams operate.

Banking income remains robust

During 2023, the Group earned strong net interest income on its balance sheet due to higher swap curves and an increased spread, as a result of the lower rates paid on deposit liabilities. At the beginning of the year, the Group guided that it expected this to decline for 2024. However, changes in expectations regarding the number of rate cuts in both the US and UK, along with balance sheet expansion, have resulted in net interest income from cash management increasing by 2% to £16.2m (H1 2023: £15.8m).

The Group expects further growth from its trade finance and liquidity services business as we take steps to expand credit limits to a small, highly selective group of clients, including central banks whose risk profiles we understand well. These credit lines will be used by clients specifically to facilitate their FX and Payments needs, primarily driving incremental transactional income as well as Net Interest Income. Given our understanding on how frequently these facilities cycle on an annual basis, in the Group's experience, for each £1 we increase trade finance balances, we create approximately £4 in additional FX volume in a given year which presents an exciting incremental growth opportunity for the Group.

Adjusted EBITDA margin compressed reflecting lower revenue and continued expansion

My initial assessment indicates that the Group's lean operating structure and relatively fixed operational cost base allows for a greater level of flexibility. The business prudently continued to invest in its long-term growth plans through the volatility experienced in the second half of the last financial year and the first half of the current one.  Inevitably, this has compressed adjusted EBITDA margins from 56% in H1 2023 to 33% in H1 2024. It is also important to emphasise that run-rate costs have increased as a result of strategic investments such as expanding the EU office, set up costs for the US office, significant front-loaded costs associated with our new consolidated headquarters in London and expansion of our workforce. We have also made some efficiency gains as I have reduced the size of the executive team and delayered the organisation in various places, we continue to monitor costs carefully and to make sure we are adding in the right areas. We are expecting widening operating margins in the second half as we deliver increased revenue, and with costs remaining broadly flat to H1 resulting in an overall blended Adjusted EBITDA margin in the high 30s for the full-year.   

Continuing on our path to invest for growth

Our investment plans remain unchanged as the business invests in people, technology and the network. In the first half the Group spent £6.8m (H1 2023: £2.0m) of "core" or intangible capex, which equated to 12% (H1 2023:3%) of Gross Income. This was higher than our usual run-rate given a renewed focus on product development, such as expanding our global payments reach, enhanced straight through processing and adopting a new flexible FX settlement system. We also spent another £2.2m (H1 2023: £0.2m) on fixed asset capex which was largely due to the fit-out of our new London Bridge Headquarters, which has a higher capacity than our previous offices and will attract a wider pool of talent. We also saw our underlying costs excluding depreciation and amortisation increase by 16% largely due to targeted expansion in our workforce to better serve our growing customer base and widening of our geographic footprint.  

We are working on a broad pipeline of exciting projects which will deliver tangible benefits over the medium to long-term, which will further diversify the Group's revenue mix and for which we are incurring cost today. Highlights include:

·      the development of new products, such as FX forwards and swaps;

·      investing in data and analytics platforms to understand client trends to better develop future products;

·      developing innovative ways to improve connectivity to new payment channels; and

·      providing clients with 24-hour, round-the-world trading.

These are complemented with investments in our people. We are expanding the salesforce and network team to facilitate the onboarding of new clients, increasing our share of the wallet with existing clients and increasing the number of correspondent banks with whom we have relationships. We are attracting a high calibre of senior staff from across the industry, due to their belief in CAB Payment's purpose and our potential.

Secondly, there is a burgeoning need to be closer to our key customers on the ground, in their local markets. The Group will be investing more in local capabilities in order to better service customers, broaden the network and build on our relationships with local central banks and regulators.

Finally, our sharp focus on growth will require us to refresh and optimise the skillsets of our people. We are creating a corporate ethos that is even more customer centric by leveraging data and analytics, creating multi-product sales disciplines and encouraging a collaborative, execution and performance driven culture. We have made significant leadership changes in the business which has involved the recruitment of external talent with the expertise to drive our business and culture forward, and deliver our full potential.  

We will continue to keep the market updated as we progress on these exciting and tangible initiatives.

Strategic assessment - the fundamentals are strong, the growth platform is there: diversification and improved execution are key

Prior to being confirmed as Group CEO, I had the benefit of time to thoroughly assess the organisation and its strategic positioning.  That review has re-confirmed that CAB Payments has a differentiated position in the specialist FX and payments market. It has unparalleled access to markets across Africa, deep rooted relationships with global IDO's and Emerging Market Financial Institutions (''EMFI'') clients (as well as governments and central banks), underpinned by strong trading execution capabilities. When combined with being a regulated banking institution, the Group is a standout FX and payments service provider versus its peers in the B2B space.

In short, the foundations of a large-scale, high-quality business with the capacity for strong growth in revenues and margins are all there. However, there is work to do to evolve the Group into a less volatile, highly-diversified business which can demonstrate sustainable growth. This will come through improved execution of our strategy. Over the medium term, the management team will focus on the execution of four strategic pillars that deliver a diversified business that is sustainable and growing profitably, namely:

1.   Network - strengthen the breadth and depth of our network;

2.   Clients - deepen existing relationships, expand client base;

3.   Platform - leverage the banking licence to accelerate FX and payment volume growth; and

4.   Invest and innovate - disciplined capital management to drive value for all stakeholders.

1.  Network - Strengthen the breadth and depth of our network

The Group's network is core to its business and allows advanced execution and competitive pricing for our clients. Thanks to our UK banking licence, the Group has exceptionally strong relationships with local liquidity providers, banks and central banks. As at H1 2024, the Group had 237 payment partners (H1 2023: 205) and 121 liquidity providers (H1 2023: 112) which was growth of 16% and 8% respectively on the prior period. It is essential that this growth and quality in our network accelerates.

Our existing network reflects our focus to date on our transacting business in certain corridors. In turn, this has left the Group overly-concentrated and therefore subject to higher risk of certain dislocations which were out of our control. This also meant that the Group has historically been reliant on fewer providers for its liquidity.

Now, our focus is to expand the network with additional on-the-ground presence in new and existing geographies. We will continue to develop the network across African markets, to maintain our leadership position, but will also drive senior relationships in new regions such as LATAM and the Middle East. A process to hire senior personnel in strategic areas is underway to begin this expansion effort. We are confident that this will provide an increasingly diverse client base with the liquidity, execution and pricing they need. We will take a more "de-centralised" approach to sales which allows us to be more culturally aligned to our customers and form deeper relationships with physical presence on the ground. Central banks are key to this process in terms of opening up liquidity and channels in specified regions.

2.  Clients - Drive growth in new relationships and deepen our current relationships across our global footprint, better understanding and servicing our clients' needs

Today, we have a high-quality client base across major market banks, central banks, EMFIs, IDOs and Non-Bank Financial Institutions (NBFI). However, revenue from these clients is concentrated towards the top 25%, leaving a significant tail of low-transacting clients with significant untapped potential. We are therefore focused on better understanding their needs and expanding the monetisation of those relationships. To complement this growth area, we are developing new client relationships in our target geographies, using our newly-acquired EU licence and our upcoming US licence as a springboard.

There are three material actions we are taking to achieve this:

a.   building our senior sales leadership in the UK, EU and US;

b.   investing in the expansion of the overall sales force, covering multiple client types and geographies; and

c.   a new sales incentivisation scheme which aligns individual performance against monetary targets and our overall strategic aims.

Our intention is to at least double the size of the salesforce over the next three years. Our focus will be on senior sales personnel with a track record in our segment for driving relationships at the decision-maker level amongst a diversified target client base. A recruitment drive is already in place and we will expand this with the organic cadence of the business. A revised sales incentivisation scheme will drive better individual performance and alignment to the overall Group plans. This is a meaningful change and will drive the right behaviours and support sustainable top line growth for the future.

3.  Platform - Leverage the banking licence to accelerate FX and payments volume growth

The Group's main subsidiary, CAB, is a PRA regulated UK banking institution which allows it to operate in ways that many other payment companies cannot. For example, its rigorous operational and compliance-based operating model has been a strong enabler of our network and its ability to open Nostro and Vostro accounts with local institutions. It is also able to effectively pool capital to generate effective returns. This is underpinned by the strong PRA regulatory framework in which we operate, giving our clients confidence that they can trust and partner with us safely.

Our banking model allows us to offer short-term liquidity facilities and trade finance to clients. To date, this has operated under a limited risk appetite framework. By offering multiple services to clients where we can assess their immediate product needs, we are able to foster even better client loyalty and increase our share of wallet, especially to clients for whom price is a significant factor.

In May 2024 we raised the total internal risk appetite of our trade finance lines from £100 million to £200 million and our liquidity as a service lines from £35 million to £70 million. We have started to offer these increased lines to our existing clients that exhibit a strong credit profile and will grow this as our operations grow. Each of these actions will drive a multiplier effect on transaction (Wholesale FX and Payments) volumes which is key driver of growth in our business.

4.  Invest and innovate - Disciplined capital allocation

We have ambitious plans to grow the business. However, due to our banking structure, we need to set aside significant capital to underpin our regulatory capital requirements which increase with growth in revenue and balance sheet activities. This leaves a small proportion available for capital investment. Our highly cash-generative business model will finance these plans in the short and medium term.  Looking to the medium-term, capital deployment will be essential to maximise the growth opportunity ahead of us. We see this as largely organic, but could also include pursuing select inorganic opportunities that fit our strategic priorities. If we believe we cannot derive market leading investment returns or there is significant surplus capital to our anticipated regulatory capital requirements then we will consider returning capital to shareholders, however we do not see there being sufficient spare capital in the immediate future to pursue this strategy without sacrificing growth.

Our investment focus will be largely centred on our already strong technology estate both on the client-facing front-end as well as operational resilience and automation. On the front-end we are supporting the launch of new products such as FX derivatives, next generation payment rails and improving workflow through straight through processing. We have already hired a new Head of Payments to drive our payments products forward and provide innovative solutions to our clients.  On the operational side, we are making better use of AI to improve efficiencies in AML / KYC screening, transaction processing resiliency and updating our core payments APIs. This will allow us to process significantly more volume and lower transactions costs.

Outcome: Diversify, reduce concentration and drive sustainable growth

We believe that effectively executing against the above four strategic pillars will deliver strong fundamentals that will grow attractively year-on-year. Prior to my arrival, business growth was predicated on strong margins in select markets, notably those where positive dislocations were present. We are now shifting to operational execution where driving sales, expanding clients, expanding the network and geographic presence will ultimately drive increased volumes through our platform and truly offer 500+ currency pairs across 140+ countries.

These steps will lower concentration risk and will set a path for less volatile revenue generation. Driven by growth in revenue from other payments and currency corridors, as well as the reduced contribution from the three identified West African currencies, this concentration dropped significantly in the first half of 2024, a trend we want to continue to develop a more predictable and sustainable business.

We will be assessing the quality of delivery of our strategy against a number of strategic KPIs, these include: 1) growing the size of our network of partners and liquidity providers, 2) growing the number of clients, 3) growing the revenue generated per client, 4) reducing the proportion of Gross Income driven by the Top 5 currency corridors, 5) increasing in the proportion of revenue driven by LATAM / Middle East and APAC regions and 6) increasing the amount of capital available for use.

Outlook

I am a strong believer in the purpose driven growth prospects for the Group based on the global market opportunity before us. The emerging markets retain strong economic growth dynamics that are compelling for well-entrenched infrastructure players such as CAB Payments.

I am confident that the focused execution of our strategic pillars above will allow the Group to deliver sustainable and attractive growth year-on-year, while improving operational leverage to drive higher adjusted EBITDA margins over time. Gross Income growth will continue to be driven by our core transactions business (Wholesale FX & Payments) and supplemented by banking income. We will provide more details on our medium-term outlook at the time of the full-year results in March 2025.

As for 2024, the business is now on a more sustainable trajectory with 2023 proving to have been an exceptional year. The Group also believes that in 2024, there are no significant tailwinds in its major corridors. As a result, we expect Total Gross Income for 2024 to be marginally down compared to last year, while continuing to demonstrate double-digit growth in its underlying transactions business (beyond NGN, XAF and XOF).  

I look forward to continuing to engage with all our stakeholders as we deliver on our purpose and execute on our strategic and operational plans.