"There are three things in life that deserve no mercy – hypocrisy, tyranny, and fraud" – Frederick William Robertson (English Vicar)
Jumia is Africa’s largest e-commerce platform, operating in 14 countries including Nigeria, Kenya, Ghana, Algeria, Angola and Senegal. The company listed on the NYSE in early April. Its share price almost tripled in the first three days, but since then euphoria has been replaced by doubt.
Last month, Jumia disclosed it had 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 its network of commissioned agents.
But investors have been more charitable to the company than Reverend Robertson would have liked. The stock has only fallen 33% since the disclosure.
In our view, the fraud revelation raises three questions:
(1) How material is 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. 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.
Jumia has been miscast as Africa’s Amazon
At the time of its listing, Jumia was touted as Africa’s Amazon, but we think this view is misplaced. Firstly, Africa’s retail infrastructure is weak and at a nascent stage. Secondly, Amazon became cashflow-positive in 2002 and profitable in 2003, but those factors are absent for Jumia. And thirdly, Jumia will find it more difficult to access the deep capital markets that drove Amazon (and other Western e-commerce) growth.
Jumia is highly cashflow negative. 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.
A few months ago Jumia was the hottest stock in e-commerce, but now it’s out of fashion. Markets can be forgiving, but Jumia will have to work hard to achieve redemption.