Jumia: To Stay or Go? Early Investors In A Dilemma

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Friday, January 24, 2019 / 12.50PM / Managing Editor, Teslim Shitta-Bey, Header Image Credit: Ethical Jobs

 


Investors in Africa's closest thing to Amazon are in a dilemma as to whether to sweat a recovery in the company's stock price or dump the stock and count their losses. Their concerns are understandable as the company's share price has dropped on the New York Stock Exchange (NYSE) from a 52-week high of US$49.77 in May 2019 to a more recent US$8.13, representing a value loss of US$41.00 or -83.66%.   

 

The company's operating performance has been sparse, and as losses persist, investor confidence has waned. So what has been the trouble with the company? Jumia's problems have been a few shades of business missteps and learning curve opportunities. The company's operations across Africa have been difficult with a slowly growing global economy and dipping real consumer incomes, while activities in Nigeria, the largest market, have at times appeared weak.


 

A Rearview Look

 

Income Statement


  • Gross Merchandise Value (GMV) went up +39% between Q3 2018, and Q3 2019, the rise in GMV suggests that the platforms basic retail activities have nudged forward noticeably in addition to an increase in its online payment solution


  • Annual Active Consumers for the 12 months ending September 30, 2019, grew by +56%, and the number of Orders for the quarter grew by +95% on a year-on-year basis. The fact that active consumers (those that have made at least one purchase over the period) grew by over +50% Y-o-Y shows that the company has been able to sustain a growth in underlying service demand, dispelling earlier concerns about the company's capacity to retain customers as a result of  alleged poor product quality and indifferent customer service delivery

  • The company's fastest-growing categories on its platform in terms of items sold included:

  1. Digital Services on JumiaPay Mobile Application for payment of utility bills and airtime (payment revenue here were in triple digits)
  2. Fast Moving Consumer Goods (FMCGs) sales on the platform were a major source of growth. Groceries and similar products grew by +99% over nine months. Granted that these consumer items involved smaller-sized individual purchase values, they formed the basis of repeat patronage on a sustained basis


The launch of Jumia Mall in September 2019 provided Jumia with the opportunity to create e-shops on the platform for specific brands thereby improving the consumer transaction journey which should improve the company's GMV by Q4 2019


  • Total Payment Value (TPV) of the company in Q3 2019 rose to 2m Euros up by  +95% from its Q3 2018 value. The number of JumiaPay transactions got to 2.1 m, up by +262% from a similar period of 2018, showing major operational growth in digital payments on the platform. In Q3 2019, about 31% of orders at Group level came through JumiaPay compared to 16% in 2018, probably reflecting the company's ability to leverage its marketplace flywheel to drive the adoption of JumiaPay.
  • In addition to topline growth, Jumia over Q3 2019 was able to push up monetization or its ability to turn visits into cash, such as through advertising revenues and commission payments. The company's gross profit number grew by +45%, while its marketplace revenue went up +52% in Q3 2019 as against Q3 2018 (see table 1 below).


 

Table 1 Jumia Gross Profit for 3 Months Ended September 2018 and 2019

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Marketing and Advertising Commission was 8% of marketplace revenue in Q3 2019 as against 2% of market place revenue in Q3 2018. The changing composition of marketplace revenue in favour of Advertising and Marketing suggests greater diversification and longer-term stability of top-line future earnings.


  • Jumia Lending helped in the origination of approximately 5 million Euros worth of loans to more than 770 sellers on its platform since its launch in early 2017. The average loan amount was around 3,200 Euros for an average duration of 5 months. 
  • A challenge on the Income Statement side as of the Q3 2019 report was the +55.4% rise in Fulfilment Expenses, indicating a significant leap in logistics costs over the one year between October 2018 and September 2019. Jumia's cost of distribution (including warehouses and pick up stations) rose from 13.32m Euros in Q3 2018 to 20.71m Euros  in Q3 2019. The company noted that "Fulfillment expense this quarter got hurt by a higher proportion of cross-border packages shipped from overseas sellers as well as a higher proportion of packages delivered outside primary cities."
  • In addition to logistic cost spikes, Jumia appeared to have had trouble keeping General and Administrative Expenses down. G &A expenses went up by +45.6% between Q3 2018 and Q3 2019, which was indeed faster than the growth in its GMV, thus lowering the ratio of G&A-to-GMV on a year-on-year (Y-o-Y) basis (see Table 2 below).

 

Table 2 Jumia Revenue For 3 Months Ended September 30, 2018, and 2019

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Statement of Financial Position

 

  • The company's net current assets (an indication of working capital) went up from 43.21m Euros in December 2018 to 228.63m Euros in September 2019, a growth of +429.10%. Most of the growth was attributable to the +125.64% surge in cash and cash equivalents from 100.64m in December 2018 to 227.07m Euros in September 2019. Also, there was a 64.12m Euros  investment by way of a term deposit in September 2019 as against no such investment in December 2018. 

  • Jumia's liquidity ratio shifted from a narrow 1.47 in December 2018 to 3.23 in September 2019, indicating a strengthening of the company's liquidity position and an improvement in its underlying business sustainability

  • The e-commerce platforms equity capital rose from 133,000 Euros  in Q3 2018 to 156.82m Euros  in Q3 2019, the improvement in equity suggests investors have put 'more skin in the game' to build confidence in the stability of the company's operations

  • Inventories rose from 9.43m Euros  in December 2018 to 10.28m Euros  in September 2019, a growth of +9.01%, which was understandable given the rise in GMV.

  • Analysts have, however, expressed concern about the steep rise in Jumia's fixed assets with its property and equipment rising from 5.02m Euros in December 2018 to 17.46m Euros in September 2019, representing a +247.81% increase in the company's non-trading assets. The apparent implication is that the company's breakeven margin would rise noticeably by H2 2019 as the B2C and B2B platform grapples with a lower return on average assets (ROA) by the year-end.

 

 

Outlook 2020: Reading The Tea Leaves

 

 

At a recent Breakfast meeting with analysts during the week, however, Jumia's management gave fresh perspectives on the digital market platform's current performance and expectations for 2020. The takeaways from the breakfast briefing included but were not limited to, the following:

 

  • Promotion of Mrs. Juliet Anammah to Chairwoman Jumia Nigeria and head of institutional affairs at the Group level. Annamah's promotion would mean she would have more time for digital governance engagements with governments and oversight agencies across the African continent. Anammah will have to contend with recent legislation in Nigeria's recent Finance Act 2019 which taxes digital market transactions; she will also have to work with Telcos and State governments in Nigeria on keeping digital charges sufficiently low to avoid reversing the gains from digital inclusion made in the last five (5) years.

  • Replacing Anammah as CEO of Jumia Nigeria is Massimiliano Spalazzi ("Massi"), who had previously spent four years in Nigeria before starting up other Jumia operations in a few other African countries. Spalazzi, who is also Group Executive Vice President, market place, will have to face the task of streamlining Jumia's operations to squeeze greater value per customer and cost efficiency and value addition per vendor without diminishing the quality of the customer's transaction journey. He will also have to deal with the challenges associated with logistic expenses, which will escalate as Jumia pushes into more rural parts of the country in 2020. Currently, 50% of Jumia's business occurs in major cities, while approximately 25% occur in rural communities. "Massi" will equally need to tackle the problems that the company had in 2019 with its JForce agency programme; the agency difficulties appear to be largely out of the way as tighter governance procedures have taken place. Keeping an eye on ensuring decent corporate governance in this area would be critical to ensuring profitability and corporate sustainability in 2020 (see Illustration 1 Jumia SWOT analysis Q3 2019 below).


Illustration 1 Jumia 9 Months 2019 SWOT Analysis

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  • To ease customer purchase experience, Jumia has allowed cash-on-delivery (COD) transactions in 15 cities of the country to relieve customers in these cities of peculiar payment challenges.

  • In line with its business growth strategy, the company has hired 1,000 new staff with 30 of the fresh intakes being at the managerial level. The new recruitment suggests a bullish outlook to e-commerce business in 2020, and more importantly, it underscores Jumia's growth thrust in the new year on the back of what is suspected to be a successful 2019 performance as repeat customers climbed significantly on the platform leading to a significant improvement in gross merchandise volume (GMV).

  • The company has divided itself into three key platforms, namely; market place, logistics and payments (see illustration 2 below). The three-pronged business paradigm allows the company to concentrate on three strategic business units (SBUs) and drive cash flow from the separate business lines. It appears that Jumia would in 2020 try to grow its payment platform following a model similar to that adopted by Alipay, which leveraged on the B2C and B2B digital market place of Alibaba and PayPal, which took advantage of the digital retail platform eBay. The PayPal platform was spun off by eBay in 2015 (thirteen years after eBay's initial acquisition). Digital market places give payment solutions access to large customer bases and contribute significantly to the success of the payment platform. Will JumiaPay compete with deposit money bank (DMBs) solutions? Not necessarily. JumiaPay will have to work with local banks to ensure smooth backend settlement operations but it provides a more convenient online shopping experience and eases the customer's service delivery journey. In 2020 it is expected that JumiaPay will be a large part of the company's service delivery value chain.

Illustration 2 Jumia Three-Pronged Ecosystem 2020

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  • It appears the company will concentrate on scaling up the number of repeat and regular purchases per customer. In line with this objective, the company has decided to create a premium service called JumiaPrime. If the company can ramp up its customer purchase frequency in 2020, it would be in a position to increase GMV and reduce sales and marketing cost-to-GMV while dragging up market place revenue. The point of concern, however, will be the recent addition to staff and the expected increase in the company's General & Administrative expenses.

  • In 2019 Jumia's operating loss rose from 40.6m Euros in Q3 2018 to 54.6m Euros in Q3 2019, representing an operating earnings decline of 34.6% year-on-year (Y-o-Y), the company's management expects to see the negative figure begin to decline in 2020 with lower operating costs-to-GMV ratio, even though fulfillment cost-to-GMV may stay upwardly sticky for a while.

  • In 2019, Jumia saw increasing participation of women vendors on its platform. In one month of 2019 over 40% of products sold on the platform were sold by women. Increased women participation may signal a significant growth of the company's GMV and market place revenue in 2020 as women tend to be more active traders in local retail businesses (the platform currently has 10,000 vendors).

 

Market Talk

 

On a year-to-date (YTD) basis, Jumia (JMIA) went up +0.49% on Thursday, 23 January 2020. Nevertheless, that is cold comfort for early investors in the stock who bought into a bullish market at US$49.77 per share. What this means is that those that bought the stock in the middle of 2019 at its IPO price of US$14.50 per share would have lost -43.93% of their value and those that bought at the top of the bull run at US$49.77 per share have lost -83.66% on the stock price at listing. What to do? Early entrants who bought into the Jumia proposition are stuck. Exiting the stock now would result in heavy losses, although part of this could get charged off against capital gain taxes (CGT) on other assets.

 


Chart 1 Jumia Share Price Movement Year To Date 2020

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Source: New York Stock Exchange (NYSE), Proshare research

 


For those thinking of buying into Jumia, this would be a time to go long. Jumia has traded within a mild bullish channel since the beginning of the year, regardless of its Q3 2019 earnings which dipped below earnings for Q3 2018. However, Jumia's GMV, market place revenue and monetization numbers have headed in the right direction. Furthermore, analysts believe that the company's Q4 2019 numbers could show stronger underlying gains capable of reducing year-end losses. More importantly, Jumia appears set for a brighter year in 2020, but with a lot riding on the company cutting down fulfilment costs, pushing growth in GMV and keeping a close watch on rapidly rising G&A expenses.

 

The company will also have to do a neater job of protecting brand equity by complying with best global governance practices and being more transparent in tackling market sensitive information concerning director's insider dealings.

 

 


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Proshare Nigeria Pvt. Ltd.


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