We reiterate our Buy recommendation and raise our target price for Jumia by 15% to US$14 due to a higher valuation paradigm and better operational prospects from the partnership with UPS.
United Parcel Services Inc. (UPS) has entered into a partnership with Jumia Technologies AG – the US deliveries giant will use Jumia's distribution network in Africa.
Under the scheme, UPS customers can collect or drop packages at Jumia's stations starting in Kenya, Morocco and Nigeria. Plans are underway for the scheme to be extended to Ghana, Côte d'Ivoire and South Africa, with further potential for other countries in Jumia's network to be added in the future. The financial terms of the partnership were not disclosed.
The deal has two implications for Jumia:
1. Operational: It will enable Jumia's customers to access 220 countries in the UPS network. It basically connects Jumia's 8 million customers to the world and, in turn, its customers can procure goods from UPS's international network.
The UPS tie-up would increase GMV per user by 5% for Jumia in FY 22-24.
2. Profile: The UPS tie-up raises Jumia's profile and could attract interest from other global leaders such as Amazon and Alibaba. Jumia has a market capitalisation of US$1.06bn, which presents immense value relative to the overall market opportunity in African e-commerce.
More broadly, the UPS partnership shows that major e-commerce and delivery players are waking up to Africa's immense potential – according to UPS, Africa's e-commerce market could triple to US$180bn by 2025.
Valuation
We raise our DCF-based valuation by 15% (raise target price to US$14 from US$12 previously; Buy) due to higher terminal growth rate and lower discount rate from the partnership – Jumia's effective cost of equity will fall owing to the UPS tie-up. In our assumptions, Jumia's Equity Risk Premium (EPR) would fall to 13% from 15%.
At 2.5x FY 24 revenue, Jumia is at a discount to the sector:
