Equity Analysis / Nigeria

Nigeria E-Commerce: The route to profit for ride-hailing and food delivery

  • The food delivery business in developing countries is booming, but will struggle to generate profits and cashflow
  • As the food delivery battle intensifies, the cash burn in EM e-commerce may spur acquisitions and a move to efficiency
  • Investors should identify the firms with the strongest cash sustainability prospects

Online food delivery volumes have skyrocketed during the lockdown in Nigeria, with a more than 50% increase in the items sold on Jumia Food between 2 March and 27 April. Restaurants are shut to diners, meaning stranded and isolated households have few alternatives but to sample online food delivery. 

There has also been a surge of interest from ride-hailing giants in the fledging food delivery industry. Ride-hailing volumes have collapsed, and a shotgun marriage between the two industries with contrasting Covid-19 fortunes seems imminent.

Earlier this month, Uber Technologies Inc. (UBER US), the ride-hailing behemoth, made an all-share bid for Grubhub, the US food delivery company. If successful, Uber would merge Grubhub (GRUB US) – which is valued at US$4.5 billion – with its own food delivery arm, Uber Eats. Grubhub shareholders would receive 2.15 Uber shares for each share.

Food delivery in Nigeria 

In developing markets, the food delivery industry has particular issues to address. In this article we concentrate on the state of the industry in Nigeria, Africa's largest market. Though food delivery is the poor cousin of both e-commerce and ride-sharing in Nigeria, the industry now has revenue of nearly US$496m, yet it barely existed until five years ago.

The Nigerian market is led by Jumia, Africa's answer to Amazon. This e-commerce platform has a dedicated unit (Jumia Food) that has c50% market share in food delivery. Homegrown competitors include Ofadaa and Areachops.

Jumia Food has about 1 million customers spread across 30 African cities. In Lagos it has 4,000 restaurants including local leaders and chains such as KFC, Pizza Hut and McDonald's. 

Jumia Foods has the logistics to complete a delivery in 45 minutes in Nigeria, and it delivers fresh food as well as prepared meals. According to the management discussion in 1Q2020 results, there has been a surge in demand for its services after Covid-19. Other platforms have shown a similar rise.

Source: Statista.com

Could the marriage between Uber and Grubhub be replicated in Nigeria, with the country's ride-hailing leaders – such as Bolt – teaming up with food delivery companies? As with all potential tie-ups, there are opportunities and pitfalls. Investors should be mindful of the following:

(1) Food may be being delivered, but not profits... yet

Food delivery is an intrinsically unprofitable business, as it lacks the network effect. Though it is projected as a tech business, the scale economics that drive e-commerce and ride-sharing are elusive. The network effect occurs when the value of using the platform for each user rises as more users enter the platform. 

Unlike Uber, which thrives with the expanding network of riders, food delivery companies are body shops. A typical delivery person can only make about two deliveries per hour. 

According to Bloomberg consensus, GrubHub’s revenue may rise by a third by FY2022, but it may not generate positive cashflow from operations. It may be able to deliver food, but it will be a long time before it delivers profits.

Similarly, Food Jumia has seen its usage rise sharply in 1Q2020. But as far as we can tell, it does not seem to be profitable yet. The vast distances and stifling traffic of urban Nigeria means that the average deliveryman can only make a single delivery per hour. The economics are even more onerous, and if Food Jumia cannot turn a profit in a lockdown, it may never do so.

(2) Predatory pricing in Nigeria is a problem

Jumia Food now works with restaurants to offer relatively cheap meals. The typical pricing is in the range of US$4-5 per meal. This is an estimated 15% less than the 2018 average. The average user orders about six times a month, across the platform.

However, Jumia Food and its peers seem to have adopted a predatory pricing policy. They charge independent restaurants as much as 20% of an order, according to our estimates. This dilutes the profits of Nigeria's independent restaurants, and may not be sustainable.

(3) Nigeria's food delivery growth may plateau 

The total size of Nigeria's food delivery business may triple from US$172m in 2017 to US$465m in 2020. The drivers are the discounts that Food Jumia has been procuring for customers. But we expect this growth trajectory to flatten in 2020-24 as the business becomes unsustainably cash negative. 

There are two categories in the field – platform-to-customer delivery and restaurant-to-customer delivery. Food delivery platforms are not interested in following the Netflix model and expanding their own ‘content’ (ie in-house meal production). But restaurants recognise the merits of using platforms like Food Jumia. Given these dynamics, we expect the restaurant-to-consumer segment to outnumber platform-to-consumer delivery by a factor of 2 to 1 by 2024.

The main focus for growth is likely to be on the volume front rather than average revenue per user (ARPU), as ARPU is almost flat. Nigerian food delivery ARPUs are less than a fifth of the corresponding level in China, where food delivery and online payments are far more advanced.


Source: Statista.com

Source: Statista.com

(4) Food delivery would worsen EM e-commerce cash burn 

EM e-commerce is on the rise, but in the Covid-19 era the rate of cash burn in the industry could come under greater scrutiny. Unfortunately, the food delivery business could actually increase the cash burn of EM e-commerce. Amazon turned the corner in terms of cashflow from operations in FY2001 through judicious working capital management. It was able to renegotiate its procurement arrangements. The food delivery cash burn may encourage Jumia and its peers to adopt similar measures. A further scenario could be an acqusition of the fledging e-commerce players in markets such as Nigeria by major global companies such as Alibaba and Amazon. 

Such an eventuality may encourage a rapid alliance between food delivery and ride-hailing. The two industries both have a need to arrest their respective cash burn. There is a replication of infrastructure in terms of technology and operating expenses, and both businesses depend on an army of foot soldiers (drivers and delivery workers) to buttress a technology platform. There is also the attraction of pooling customer information, as both segments have a treasure trove of data on customer behaviour. 


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Flash Report / Global

How to profit from the rubber bounce

  • Rubber glove demand has risen sharply with Covid-19
  • Rubber has been in a long slump but could bounce back as supply is tightening
  • Proxies for the rubber rally include Thailand's Halcyon Agri and Singapore's Sri Trang
Nirgunan Tiruchelvam @
Tellimer Research
24 June 2020

Covid-19 has led to a huge boom in demand for rubber gloves. Rubber companies (producers and processors) are making hay while the sun shines by rushing to the market.

Thailand's Sri Trang Gloves, one of the largest rubber glove producers, has just announced plans to raise US$484m. Halcyon Agri (HACL SP – controlled by a Chinese state-owned enterprise), the world's largest rubber processor, is looking to raise S$175m in a rights rise. The rights are priced at a 36% discount to the last transacted price on 19 June. Halcyon Agri is.

Meanwhile, the world's largest rubber glove producer Top Glove, listed in Malaysia, has risen 251% this year. It expects to generate 35% of its revenue growth on the back of the Covid-19 surge.

Covid-19 drives demand for gloves

With rubber gloves being used by medical practitioners to prevent the spread of disease and by the general public as PPE (personal protective equipment), Covid-19 has seen orders swell.

Rubber glove demand is expected to rise by nearly 17% yoy to 330bn pieces in 2020, according to Margma, an industry observer. Top Glove has reported a four-fold increase in orders. The lead time for orders has risen from 30 days to almost 300 days.

Rubber prices could surge

The world tends to focus on industrial commodities such as oil and iron ore, disregarding rubber, but the latter is vital for car tyres – c70% of the world's natural rubber is used for tyres, with the remainder is used for rubber gloves, condoms and other applications.

Rubber has collapsed more sharply than oil in the recent commodity rout and is now at a 15-year low, more than 60% below its 2010 peak, mostly due to fear that travel would grind to a halt with Covid-19.

However, there are distinct signs that a rubber bounce is imminent. Demand for cars in China is robust and could rebound quickly, not least given that only c50% of Chinese families have a car. If car penetration doubles in China in the next decade, rubber supply will have to rise 50% to meet demand.

Rubber supply, though, emerges at a slow pace. It takes seven years to harvest rubber and another three to reach peak production.

Moreover, many rubber plantations are struggling, with Thailand, Malaysia and Indonesia (the main producers of the 13.9mn tonne rubber market, over 80% of which is produced in Southeast Asia) all having imposed moratoriums on rubber planting this year. Supply could contract, and 2020 could see demand exceed supply for the first time in three years.

Look out for stock market proxies

Therefore, investors would be well-served to focus on the proxies for a potential rubber price rise.

Halcyon Agri, which is listed in Singapore, with operations in Ivory Coast, Cameroon, Indonesia and China, is raising funding for an expansion and debt repayment at a turning point for rubber prices. As a processor with a tight grip on rubber supply, it could be viewed as the ideal proxy for a rubber rally.


 
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Equity Analysis / Global

JDE Peet's IPO shows there is still froth in the consumer market

  • Coffee producer JDE Peet's – the first major IPO in the Covid-19 era – has a frothy valuation.
  • It is a roll-up company that is driven by debt-financed acquisitions in the branded coffee field.
  • The company has a high proportion of goodwill in the asset base, which could be subject to writedowns.
Nirgunan Tiruchelvam @
Tellimer Research
2 June 2020

The sleepy IPO market just received an espresso shot. Amidst the doom and gloom, JDE Peet's raised US$2.5bn last week, in Europe's biggest IPO since 2018. It was also the first major listing that was conducted entirely in the brave new world of Zoom calls.

The deal is extraordinary in that Covid-19 did not dent its prospects. On the contrary, the issuers actually rushed the deal forward to benefit from the post-March stock market rally. The IPO process was reduced from four weeks to 10 days due to the overwhelming demand. The stock is up 14% since its debut on Friday.

JDE Peet's is the world's second-largest player in the consumer coffee field, with 7% market share. Nestle is the market leader with 14%. The market is fragmented and JDE Peet is looking to consolidate it. 

JDE Peet's is owned by JAB Holdings, a private investment group that manages the wealth of the Reimann family of Germany. JAB has conducted a series of leveraged backed deals to create a collection of consumer brands in both developed and emerging countries. About a quarter of its revenue comes from emerging markets.

The company sells coffee in the US, Europe, Latam and Asia. It operates 700 coffee outlets, with 80% of the coffee sold for at-home consumption, a market that has been resilient during the lockdown. It was partly this perception that made the IPO a success.

The deal shows that there is still some froth in the consumer market. It was valued at 17x EV/EBITDA which is a premium to FMCG majors such as Nestle, Unilever and P&G.

JDE Peet's weaknesses

JDE Peet's has several weaknesses, and we think these mean that investors would be better served by the tried and tested models from the likes of Nestle and Unilever.

(1) It is a roll-up company.

JDE Peet's growth is driven by organisation and not organic growth. It is a roll-up company, which is the term used to describe a company that demonstrates growth by acquiring smaller companies.

JDE Peet's now controls brands such as Douwe Egberts, Kenco and Peet’s Coffee. It also controls emerging market brands such as Old Town and Super Group in ASEAN.

The upshot is that JDE Peet's core revenue growth and EBITDA growth in FY17-19 is a lot lower than the headline numbers. Officially, its EBITDA CAGR in the period is 10%. However, if one strips out the acquisitions it is about half that amount.

(2) JDE Peet's has more debt than all the FM FMCG companies combined.

FMCG companies have efficient balance sheets, as their growth is organic. JDE Peet's is looking to manufacture growth through debt-fuelled acquisitions. It is not only betting on consumers' addiction to coffee, but it is addicted to debt-driven growth.

(3) JDE has a high proportion of goodwill in the asset base. 

We note that JDE Peet's stands out in comparison to its peers, and goodwill writedowns are possible. Heinz, a company with a similar proportion of goodwill, has had a series of writedowns in the past two years.


 
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Macro Analysis / Global

Asia: India and Indonesia riding up the Covid-19 curve

ING Think
2 July 2020

Wasted lockdowns

India was among the first countries in Asia to begin a nationwide lockdown on 25 March when officially recorded cases touched 500. But lockdown implementation was chaotic; announced just hours before it started, and dragging on with four extensions from the initial three-week phase until end-June.

Despite reportedly being one of the strictest in the world, India’s lockdown has failed to break the Covid-19 chain. Undermining it was the migrant crisis – workers from largely unorganised sectors in big cities moving back to their native states, many of whom reportedly died during the journey, whilst survivors carried the disease back to their home towns and villages. Large slum dwellings in cities like Mumbai turned out to be fresh breeding grounds for the virus. This, combined with the country’s strained healthcare system, leaves the true number of infections, recoveries, and deaths in India in question.

A weak economy will be the authorities’ argument against renewed lockdowns in both India and Indonesia

Indonesia may not appear as bad as India, but the true extent of the outbreak is also debatable, and even the official spread of the virus remains fast (see figure).

Indonesia started its movement restrictions late. The government pushed back on strict lockdown measures, and instead opted for partial restrictions on mobility which were relaxed by June for most regions given the urgency of mitigating the negative economic impact. 

With Indonesia’s recovery rate a little over 40%, there is no end in sight for the first wave of their outbreak. And in India, with the seven-day average of daily new infections running at 17k, it is probably only a matter of time before they move up into third place globally for total officially recorded cases, ahead of Russia. That said, we think a weak economy will be the authorities’ argument against renewed lockdowns in these countries.  


 
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Macro Analysis / Ghana

Ghana: Digital payments pick up; central bank confident this is a "new normal"

  • The spread of Covid-19 in Africa is prompting countries to accelerate adoption of digital payment systems
  • Ghana electronic payments rose 81% in Q1 20; bank transfers contributed the bulk of growth due to a waiver on fees
  • Mobile money transactions picked up considerably but still behind Kenya; Other players are gearing up to challenge MNO's
Nkemdilim Nwadialor @
Tellimer Research
3 June 2020

At the May Monetary Policy Committee (MPC) meeting in Accra, the Governor of the BoG, Dr Ernest Addison, noted that the 3-week lockdown, which resulted in the absence of physical banking and physical payment systems in the country (as cash transactions are a possible conduit for the spread of COVID-19) resulted in an increase in the volume of digital payments in the first quarter of the year.

Digital payments that are captured by the Ghana Interbank Payment and Settlement Systems (GhIPSS) saw an 81% increase in transaction volumes in first quarter of 2020. These digital payment systems include credit cards, banking applications, digital cash, mobile payments, smartcard-based electronic payment systems (eg. fuel cards), and electronic billing.

Interbank transfers recorded the most impressive growth, with debit transfers up 170% yoy and 55% qoq, while direct credit transfers were up 18% yoy, which we think is attributable to the GhIPSS Waiving Fees On Interbank transfer charges till June 2020. This move by the regulator will translate into lower non-interest income for our Ghana banks coverage coverage in 2020 as transfer fees account for 30% of total fee income.

Mobile money in Ghana continues its upward trend, but still lags Kenya

Mobile money transactions on the other hand, stood at GHS94bn in Q1 20, up 15% yoy and 4% qoq, which we think was supported by the relaxation of know your customer (KYC) requirements for mobile money and the reduction of fees on mobile money transactions by the MPC committee during its March 2020 meeting.

However compared to peers like Kenya, whose mobile money transactions as at December 2019 stood at cUS$90bn (84% of GDP), Ghana still lags behind with its 2019 mobile money transactions in 2019 at cUS$50bn (81% of GDP). Also, in terms of active customers – accounts which transacted at least once in the 90 days prior to reporting – Kenya recorded 28.9 million (61% of the population) compared to Ghana’s 14.8 million (49% of the population).

But Ghana is ahead on certain metrics. Ghana outperforms Kenya in terms of agent network, boasting a whopping 226,000 agents (62 customers per agent) compared with Kenya’s 205,328 agents (141 customers per agent). This suggests that mobile money agents in Ghana can still scale up their customer reach to drive growth.

Market implications

We think markets with high levels of digital infrastructure (and cash-based transactions) are most able to sustain a switch to electronic payments. A further driver is policy direction from government and its agencies, such as allowing the public to pay taxes, levies and fees through electronic payment channels. This would result in efficiency in revenue mobilisation and should help migrate Ghana into an electronic payment society.

Scale-up digital means of doing business: A large proportion of the businesses in Ghana are SMEs, and a lot of SMEs do not have strong/established electronic payment systems that work effectively and efficiently. The immediate challenge for these businesses is the adoption and scaling up of digital payment systems to eventually make digital payment the regular mode of payment.

Competition for mobile money: Mobile network operators (MNOs) MTN, AirtelTigo and Vodafone currently dominate the mobile money landscape in Ghana with a current total market share of c96%.  Their rise has been supported by a high unbanked population (c50% of the adult population is unbanked), a strong agent network and regulatory backing. As banks (Ghana Commercial bank - GCB) and other fintechs (Zeepay) slowly encroach on the space, they will provide increased competition to the MNO-led mobile money business model. Although considering the wide reach of MNO-led services, especially MTN MoMo (MTN's mobile money platform whose operations contribute c20% of total revenues) we do not see an immediate threat to their dominance.

Emphasis on combating cybercrime: Ghana lost cUS$9.8 million to criminal activity in 2019, and about US$105 the year before. Ghana was recently added to the European Union (EU) list of blacklisted countries for money laundering. As such, Ghana needs to improve its AML (Anti-Money laundering), CFT (countering terrorism financing) and KYC (know-your-customer) guidelines and compliance. The government also needs to establish institutions to take the lead in putting in place the legislative frameworks and policies to maintain secure electronic payment systems. We think the newly established Fintech and innovations office of the Bank of Ghana will be tasked with this.


 
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