Jumia, Africa's largest digital retail platform, has released its Q3 2019 financial result with no awkward surprises, indeed the companies 9 months to September 2019 and Q3 2019 results have revealed opportunities in the Fintech payment space and a generic cost reduction strategy that could protect the company's key operating performance from pushing into an economic headwind going into the final quarter of the year.
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 is a major growth source. Groceries and similar products grew by +99% over a 9-month period. Even though 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 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
Table 1 Jumia Revenue For 3 Months Ended September 30, 2018 and 2019
Statement of Financial Position
Priming The Profit Pump
Jumia is yet to make a profit from its operations on an Earnings Before Interest, Depreciation, Tax and Amortization (EBITDA) basis, but in line with proper corporate disclosure standards, Jumia has noted that its EBITDA calculations was not cast in a manner comparable to that of the International Financial Reporting Standards (IFRS), but it still gives a fair representation of the state of the company's financial affairs. Adjusted EBITDA rose from a loss of Euro 35.8m in Q3 2018 to a loss of Euro 45.4m in Q3 2019, or what amounted to an increased loss of -26.82% Y-o-Y. The companies operating loss rose by +34.6% from Euro 40.6m in Q3 2018 to Euro 54.6m in Q3 2019 (see Table 2 below).
The loss pattern of the online unicorn is consistent with similar early investment life cycle losses by other global digital giants such as Ali Baba, Amazon and even Google. What investors may consider critical at this point, however, is Jumia's capacity to build its GMV and TPV sustainably while it optimizes its business processes. So far, the company's business order expansion appears impressive with product order growth of +18.72% on a compound quarterly basis (see chart 1 below).
Table 2 Jumia Gross Profit for 3 Months Ended September 2018 and 2019
Table 3 Jumia Operating Loss and Adjusted EBITDA for 3 Months Ended September 2018 and 2019
Chart 1 Jumia Number of Product Orders Q1 2018-Q3 2019 (m)
Source: Jumia Q3 2019 Financial Statement, Proshare research
Turning Activity Into Cash Flow
Crucial to Jumia's operations are its business activity numbers which, so far, have mostly headed in the right direction. Marketplace Revenue, for example, rose from Euro 12.5m in Q3 2018 to Euro 18.9m in Q3 2019, representing a growth of +52.1%. Commissions rose from Euro 4.2m in Q3 2018 to Euro 5.3m in Q3 2019, reflecting a leap of +27.5%, while Value Added Services went up by +32.9% from Euro 3.6m in Q3 2018 to Euro 4.7m in Q3 2019. The less desired changes, however, included fulfillment costs which rose +55.48% between Q3 2018 and Q3 2019, rising from Euro 13.32m to Euro 20.71m. General and Administrative (G&A) expenses also appeared troublesome rising from Euro 22.46m in Q3 2018 to Euro 32.66m in Q3 2019 or a rise of +45.40%. However, other operation income rose from Euro 333,000 in Q3 2018 to Euro 714,000 in Q3 2019, the absolute value of income may not have been seen as large but the direction of growth of +114.41% was indicative of major improvement. Jumia's stronger operating performance shows up in its stronger cash position in the third quarter of 2019. The Groups cash and cash equivalents rose from Euro 100.64m in Q3 2018 to Euro 227.07m in Q3 2019, a growth of +125.64%.
The modest Euro 1m rise in trade receivables between Q3 2018 and Q3 2019 pointed to a greater amount of efficiency in the management of trade debtors, trade receivables rose by a modest +7.45% from Euro 13.03m in Q3 2018 to Euro 14.00m in Q3 2019.
Jumia has engaged in large investments in warehouses, pickup points and other logistic support infrastructure in the course of the first 9 months of 2019 and this has shown up in the leap in the company's investing cash flow which rose from minus Euro 2.68m in the first 9 months of 2018 to minus Euro 65.77m in first 9 months of the contemporary period of 2019, Jumia's need for further capital investment in the business is understandable, but analysts have expressed concerns over the rapid growth of fixed assets at a relatively early stage of the e-Business's evolution. Amazon stayed out of warehouse acquisition for several years before piling up heavy costs in fixed assets. Indeed, the jury is still out on whether Amazon's acquisition of large-budget fixed asset facilities in recent years would thin down equity returns and the former exclusively book-selling platform's market value. Jumia may need to slow down fixed asset acquisition to protect business margins.
The Liquidity Bulge
The saying that cash is king bears relevance to Jumia's Q3 and 9 months 2019 result as the company has evidently bulked up the size of cash in the business. Cash and cash equivalents rose from Euro 42.23m in Q3 2018 to Euro 227.07m in Q3 2019, the rise in the business's cash position may be seen as desirable from a liquidity standpoint but it could also be interpreted as leaving idle investible cash balances on the table. Investors would perhaps wait till the end of H2 2019 to see what the company did with its rising cash hoard.
A look At Debt
The continental e-commerce giant has a debt-to-equity position that is consistent with its growth aspirations and business lifecycle. The company as at September 2019 had current borrowing of Euro 3.64m which was not in existence as at December 2018. The company also had non-current borrowings outstanding of Euro 6.62m as at September 2019, bringing total borrowings to Euro 10.26m as at September this year. The proportion of debt as a per cent of borrowings as at September 2019 was 4.26%. The company's total assets- to-equity ratio in September 2019 was 1.42, suggesting that the company had 42% more assets than equity or what comes to a liability excluding equity of 48%, a financial statement position that is promising and supportive of fiscal stability if properly leveraged.
JUMIA Q3 2019; A SWOT Analysis
Jumia has shown resilience in the face of a variety of emerging challenges across African economies and within domestic local African markets, these developments have led to peculiar strategic concerns for digital retail platforms as highlighted in Jumia's September 2019 SWOT Analysis (see illustration 1 below).
The company's topline earning numbers have grown steadily and is likely to continue to scale up into 2020 and 2021 based on Proshare's linear two-year GMV forecast.
The company's various expense heads such as G&A and have been rising and may need to be tamed to augment the growth in TPV and GMV.
The rising penetration of data by Nigerian users of telecommunication services, may lead to a surge in online digital commerce. Admittedly, however, only about 30% of revenues by Nigerian Telcos presently come from there data business, suggesting that if data penetration rates increase (given the sizable headroom that presently exists), digital natives are likely to increase spending and improve Jumia's share-of-wallet income. Furthermore, Jumia's JumiaPay service for small-scale borrowing activities should give a boost to digital purchases at relatively low default risks and push GMV and marketplace revenues up.
An intensification of trade conflict between China and America and increased uncertainty in the economic progress of Europe could lead to a slowing of the global economy and a reduction in consumer spending on the African continent. In addition, an increasingly insular Federal Government of Nigeria (FGN) trade stance in 2019 could slow down online digital transactions.
Illustration 1 Jumia 9 Months 2019 SWOT Analysis
Back of The Envelop
Jumia has had to deal with unique challenges that characterize creating a unique and sustainable digital customer journey in an emerging African digital market such as Nigeria, this has involved cost over runs, human resource oversight challenges and escalation of logistic costs, but these experiences should provide Jumia with a learning opportunity and a corporate governance moment designed to improve the digital retail journey of consumers across continental markets (see illustration 2 below, "Jumia's Four Bar Strategy 2019-2022").
Illustration 2 Jumia's Four Bar Strategy 2019-2022
The stock's price has been bearish for most of the year as it fell to a recent market price of US$ 5.52 (Thursday November 14, 2019) down from US$43.33 at the beginning of May 2019 (see chart 2 below). The recent 9 months 2019 result of the company's performance may begin to see equity traders reignite interest in Africa's premier digital marketplace as it grows its digital footprint, especially in Nigeria.
Chart 2 JUMIA Market Price and Volume Movement May-November 2019
Source: Yahoo! Finance
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