Equity Analysis /

Jumia: Dark clouds gather as fraud is disclosed

    Nirgunan Tiruchelvam
    Nirgunan Tiruchelvam

    Head of Consumers Equity Research

    Tellimer Research
    22 August 2019
    Published by

    We downgrade our target price for Jumia to US$10.00 (from US$16.2), implying 19% downside. We cut our target P/Sales multiple to 3.6x (from 6.0x) due to the worsening corporate governance risks. We also note that the lock-up expiration in October is likely to add to the pressure on the stock. 

    2Q results indicate enduring operating difficulties. Jumia reported an adjusted EBITDA loss of EUR44.4mn. Though 2Q gross merchandise value (GMV) rose 69% yoy, the net profit run-rate suggests that Jumia is on track to record net losses of EUR298mn in 2019. We expect Jumia’s net losses and cashflow from operations to be almost double its revenue.

    The results confirm our fears. The business is unsustainably cashflow negative, and we are concerned about the viability. At the current burn rate, Jumia’s cash levels will be low in FY 21. By FY 22, it may need another capital raise, even if operating margins and inventory management improve. 

    Jumia has disclosed that its sales agents and employees have engaged in improper conduct. The employees and agents have been terminated. The quantum of the fraudulent activities represented 4% of Q1 19 sales. These revelations come close on the heels of the allegations made by Citron, a short-seller, about widespread fraud in the business. 

    We cut our P/Sales multiple-based valuation. We cut our P/Sales multiple from 6.0x to 3.6x in our valuation model, as we consider that Jumia’s corporate governance risks have escalated with the current revelation. This adds to the serious concerns about the viability of the business. We reiterate our Sell recommendation with a new target price of US$10.00, implying 19% downside.

    Potential levy on card-based online purchases in Nigeria is negative for Jumia. The Federal Inland Revenue Service (FIRS) is considering introducing a 5% levy on card-based online purchases in Nigeria, which may become effective in 2020. Based on the FIRS Chairman’s media comments, it would be a tax on customers, raising the unit cost of buying items through that particular channel and impacting revenues for e-commerce businesses such as Jumia.