Earnings Report /
Nigeria

Covid-19 and the opportunity for Africa’s Amazon

  • Cash generation is poor compared with peers, but it is improving, and the company is now in deep-value territory

  • E-commerce giants may see Jumia as an acquisition target given it has lost 80% of its value in 12 months

  • We upgrade the TP to US$6 (31% upside) in light of the Covid-19 operational boost and prospect of acquisition interest

Nirgunan Tiruchelvam
Nirgunan Tiruchelvam

Head of Consumers Equity Research

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Tellimer Research
21 May 2020
Published byTellimer Research

We upgrade Jumia’s target price to US$6.00 (implying 31% upside) after it received an operational boost from Covid-19 and amid the prospect of renewed acquisition interest. We raise our implied p/sales multiple-derived target price and our earnings forecast. JMIA is trading at 1x p/sales (FY 20) against an EM e-commerce average of 3.9x. Its cash generation is poor compared with that of its emerging and frontier market peers, but it is improving, and the company is now in deep-value territory.

Our p/sales multiple-based valuation suggests deep value. We employ a p/sales multiple of 1.3x in our valuation model – Jumia is trading at a discount to both developed market (38%) and emerging/frontier market (81%) e-commerce companies on this basis. EV/EBITDA, P/FCF and PE multiples do not apply here as Jumia is several years away from cashflow-positive returns, let alone profitability.

E-commerce giants may see Jumia as an acquisition target given it has lost 80% of its value in 12 months. At a market cap of US$359m and 1x p/sales, Jumia could be a decent option for cash-rich e-commerce giants such as Alibaba and Amazon. In addition, Jumia provides a unique entry point into the vast and untapped African e-commerce market.

The Covid-19 pandemic has increased demand for e-commerce in Africa and for Jumia’s products. The company’s GMV rose by 22% yoy in Q1 20. Jumia’s results reflected a four-fold increase in demand for groceries, according to its management. Nigeria, Morocco and Tunisia also saw sharp rises in sales in the period.

As investors look for the next Amazon or Alibaba, smaller EM e-commerce stocks have risen sharply since the late March low – by as much as 65-88%. Not only has Covid-19 increased the sales of these players, there is a renewed race to find the next tech giant. The older generation of tech behemoths are looking to put their cash reserves to work at a time of deep value.

Jumia is heading for a EUR178mn in loss in FY 20, which may prompt a strategic sale to Amazon on Alibaba. Jumia’s cash bleed is relatively high and the net profit run-rate suggests it is on track to record CFO losses of EUR178mn. We expect Jumia’s net losses and cashflow from operations to be almost double its revenue. The recent interest in the space suggests that this cash burn could be funded by a large player.

Jumia’s weaknesses are in the price and may attract interest. At the current burn rate, Jumia’s cash levels could be depleted by FY 21. By FY 22, it could need another capital raise, even if operating margins and inventory management improve. The business is still cashflow negative and concerns about its viability may lead Jumia to look for a larger supporter.