Equity Analysis /

Africa’s Amazon goes into free fall

    Nirgunan Tiruchelvam
    Nirgunan Tiruchelvam

    Head of Consumers Equity Research

    Eronmosele Aziba
    Eronmosele Aziba

    Equity Research Analyst, Consumers

    Tellimer Research
    11 October 2019
    Published by

    We downgrade our target price to US$6.00, implying 18% downside. We have cut our target price/sales multiple to 3.0x due to the expiration of the 180-day post-IPO lockup period. The stock is trading at around half its IPO price, but core investors such as MTN Group and Goldman Sachs are facing hard choices. Jumia has done little to assuage investor fears of massive corporate governance risks, as its operations falter. 

    Jumia is heading for a EUR298m loss. The company’s cash bleed is alarming. Although Q2 GMV rose by 69% yoy, the net profit run-rate suggests Jumia is on track to record net losses of EUR298mn in FY 19. We also expect Jumia’s net losses and cashflow from operations in FY 19 to be almost double its revenue.

    The latest Q2 19 results confirm our view of Jumia’s vulnerabilities. The business is unsustainably cashflow negative and we are generally concerned about its viability. At the current burn rate, Jumia's cash levels will be negligible (if not depleted) by FY 21. By FY 22, it may need another capital raise, even if operating margins and inventory management improve.

    Jumia’s disclosure that its sales agents and employees have engaged in fraudulent activities adds credence to Citron’s allegationsThe fraudulent activities represented 4% of Q1 19 sales. The company has fired the employees and agents concerned, but Jumia’s disclosure supports Citron Research’s allegations about widespread fraud in the business. We are not convinced that management has instituted adequate corporate governance controls.

    Our price/sales multiple-based valuation suggests further downside. We have cut our price/sales multiple to 3x from 4x in our valuation model. Jumia’s corporate governance risks mean that investors could rush for the door with the end of the lockup period, exacerbating our serious concerns about the viability of the business. We reiterate our Sell recommendation with the new target price of US$6.00, implying 18% downside.

    Jumia’s cash burn rate is unsustainable (net cash, US$mn)

    Source: Company filings, Tellimer Research