"There are three things in life that deserve no mercy – hypocrisy, tyranny, and fraud" – Frederick William Robertson (English Vicar)
Last month, Jumia, Africa’s largest e-commerce operator, disclosed instances of improper orders placed and cancelled on its platform. Investors have been more charitable than Reverend Robertson would like. It has only fallen 33% since the disclosure. In our view, the fraud revelation raises three questions:
(1) What is the materiality of Jumia's fraud?
The improper orders were EUR16mn (US$17.5mn) in gross merchandise value (GMV) in Q418 – Q219. This accounts for 2% of GMV in 2018 and 4% of GMV in Q1 19.
The fake orders are a much larger proportion of Jumia's gross profit. Gross margins are typically c6% of GMV. This suggests that about two-thirds of the gross profits in Q1 19 were tainted.
In a slim margin and negative cash flow business, fraudulent orders have a high degree of materiality.
(2) How will it prevent further instances?
Jumia has fired the employees and agents involved, and an investigation has been launched. A more pressing concern is the corporate governance risks. Jumia needs to demonstrate that its platform is not completely tainted. It needs to demonstrate systemic safeguards against similar occurrences.
(3) Does it vindicate Citron's allegation?
Citron Research, a short-seller, accused Jumia of fraud (by falsifying sales through fake invoices) and of poor execution of product delivery.
The allegations are as follows:
1. Jumia inflated its data on active consumers and merchants. There is a discrepancy between the fall 2018 investor presentation and the recent 2019 F-1 statement, amounting to a difference of 600,000 active customers and 10,000 merchants in Jumia’s releases.
2. Jumia’s high cancellation rate suggests fraud. Jumia’s management has referred to a 30% cancellation rate. Citron alleges that the cancellation rate is much higher, at 41%.
3. Jumia has a history of corporate fraud. Citron cites a 2015 news item alleging fraud and internal dealing at Jumia.
We cannot independently verify the allegations. However, the latest revelations seriously damage Jumia's credibility. Its denial of Citron's allegations seems to ring hollow.
The company has disclosed it recently uncovered instances of improper orders placed and subsequently cancelled on its marketplace platform, wrongly inflating its order volume. Some of the improper sales practices, the company said, were carried out by its own personnel in “Jumia Force,” its network of commissioned agents
We reiterate our Sell recommendation with our unchanged TP of US$10.0 implying a further 11% downside
Jumia is highly cashflow negative. We question its viability. At the current burn rate, Jumia’s cash levels will be low in FY 21 and, by FY 22. It may need another capital raise, even if operating margins and inventory management improve.