Equity Analysis /
United States of America

Jumia: Leaked report on Amazon’s African move is positive for Jumia; Buy

  • Citron Research has speculated about what Amazon's reported move into Sub-Saharan Africa could mean for Jumia

  • Our scenario analysis indicates the US-based tech giant could well opt to buy Jumia, and most likely this year

  • We reiterate our Buy recommendation on Jumia at an unchanged target price of US$11.3, implying 86% upside

Jumia: Leaked report on Amazon’s African move is positive for Jumia; Buy
Nirgunan Tiruchelvam
Nirgunan Tiruchelvam

Head of Consumers Equity Research

Follow
Tellimer Research
5 July 2022
Published byTellimer Research

Citron Research's Andrew Left has said on Twitter that tech giant Amazon could buy its EM rival Jumia this year. This tallies with media reports of a leaked document indicating Amazon's plans to expand into Sub-Saharan Africa, as my colleagues Janet Ogunkoya and Ayobami Omole discussed recently in West Africa in Focus.

Amazon has not confirmed the reports, but the document suggests the company will set up operations in Nigeria and South Africa initially. Separate media stories indicate it is recruiting in Nigeria. Amazon commenced operations in Egypt earlier this year, its first foray into Africa.

Jumia’s own footprint in Africa includes 11 markets. The company has 3.1m quarterly active users and dominates e-commerce on the continent.

We have dissected the news and run a Scenario Analysis on Jumia – see below. Our assessment that there is a strong chance that Amazon will buy Jumia, most likely this year, means we reiterate our Buy recommendation on Jumia at an unchanged target price of US$11.3, implying 86% upside from the current level.

Jumia: Footprint in Africa

Three scenarios for Amazon and Jumia

1. Amazon buys Jumia this year – probability: 50%

The simplest strategy for Amazon is to buy an existing operator this year, and Jumia is by far the most compelling opportunity, in terms of value and breadth of operations. Moreover, Amazon can afford it.

  • Jumia's recent UPS tie-up raised its profile and made it more attractive to global leaders, most notably Amazon. The company has a market capitalisation of US$605mn, which represents good value relative to the overall market opportunity in African e-commerce.

  • Jumia is by far the dominant e-commerce player in Africa, with an estimated market share of over 60%. There are other e-commerce providers such as Takealot, Konga and Zando. However, they are localised, with a presence in just a few markets. For instance, Takealot’s revenue is almost entirely derived from South Africa. And Konga is principally a Nigerian player.

  • Jumia is attractively priced at its current valuation. It is trading at a 1.1x FY 22 P/S multiple, which is a 58% discount to the 'Baby Amazon' (EM e-commerce) peer group average.

Valuation table: Baby Amazons
  • And Amazon can easily do it. It has a cash balance of US$96bn, which is c158 times Jumia’s market cap.

Amazon cash balance vs Jumia Market cap

2. Amazon tests the African e-commerce waters and later buys Jumia – probability: 30%

In our view, a less likely scenario is that Amazon could test the e-commerce waters in the major markets of Sub-Saharan Africa – Nigeria and South Africa – and then later acquire an existing player (most likely Jumia, for the reasons discussed in Scenario 1). This acquisition could be as much as three years after Amazon’s own initial launch.

The advantage of this approach is that it would allow Amazon to establish its own practices and infrastructure. For instance, one major difference between Amazon’s approach and Jumia’s is the significance of fulfillment infrastructure. Amazon’s rollouts in emerging markets have been accompanied by heavy fulfillment infrastructure buildout. Jumia’s fulfillment infrastructure is relatively weak.

But the disadvantage is that there is no guarantee that acquiring Jumia would be as alluring as it is today. Jumia’s price has dropped 90% from its peak and it represents very good value compared with its peers. This could change if the acquisition is delayed and makes this scenario less likely than Scenario 1, in our view.

3. Amazon builds its own African e-commerce operation – probability: 20%

Jumia has spent US$1.5bn in capex and opex on building out its e-commerce platform. If Amazon were to replicate Jumia’s scale in, say, three years, it would probably need to devote the same resources.

US$1.5bn is, in fact, double Jumia’s current market capitalisation, suggesting it would be cheaper and more efficient to acquire the incumbent. We, therefore, regard this as the least likely scenario of the three.

Jumia: Total expenditure since inception (US$ Mn)

Investment conclusion

On the basis of this scenario analysis, we reiterate our Buy recommendation on Jumia, with the unchanged US$11.3 target price implying 86% upside from the current share price.

Jumia: FCFF valuation (US$ 'Mn)