We upgrade Jumia to Buy with a target price of US$3.50, implying 45% upside. We downgrade our implied p/sales multiple derived target price (US$4.0 previously) and maintain our earnings forecast. JMIA is trading at 0.7x p/sales (FY 20), while the EM e-commerce average is 3.9x. Although JMIA's cash generation is still inferior to its EM-FM peers, JMIA US has fallen to deep value territory.
Our p/sales multiple-based valuation suggests deep value. We employ a p/sales multiple of 1x in our valuation model – Jumia is trading at a discount to both DM (72%) and EM/FM (82%) 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 eye Jumia as it has lost 90% of its value in the past 8 months. At a market cap of US$189m and 0.7x p/sales, Jumia could be an appropriate target for cash-rich e-commerce giants such as BABA US and Amazon. In addition, Jumia provides a unique entry point to the vast and untapped African e-commerce market.
Jumia has played a pivotal role in e-commerce growth in Africa. Africa’s internet penetration is on an upward trajectory driven by smartphone usage (the continent is a ‘mobile-first’ market where people typically first access the internet via their mobile devices). The brand has managed to grow in popularity over the years and is currently regarded as the largest e-retail firm in Africa.
Africa is relatively unscathed from the Covid-19 outbreak. Only 36 cases have been reported in Nigeria, which is a definitive market for Jumia. Hence, investors may view African e-commerce as a haven in the EM/FM space.
Jumia is headed for EUR333mn in loss in FY 20, which may prompt a strategic sale. Jumia’s cash bleed is alarming. The net profit run-rate suggests that Jumia is on track to record net losses of EUR298mn. We expect Jumia’s net losses and cashflow from operation to be almost double its revenue.
Jumia’s vulnerabilities are priced-in and may induce interest. 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. The business is still cashflow negative and concerns about its viability may lead Jumia to look for a larger supporter.