The Risks and Opportunities of The ‘African Amazon’ Jumia IPO

The Nigerian company Jumia Technologies NYSE IPO has gotten a lot of hype with the expected growth in e-commerce in Africa and because of its shareholders including Rocket Internet SE, Mobile Telephone Networks. Axa CS and Orange SA of France. The risks however are not idle.

The Nigerian company Jumia Technologies NYSE IPO has gotten a lot of hype with the expected growth in e-commerce in Africa and because of its shareholders including Rocket Internet SE, Mobile Telephone Networks. Axa CS and Orange SA of France. The risks however are not idle.

Jumia Delivery

Jumia has applied to trade on the New York Stock Exchange under the ticker “JMIA” and be valued at around $1.5 billion and be an ADR. Morgan Stanley, Citigroup, Berenberg, RBC, Raymond James, Stifel and William Blair are the underwriters of the deal. Proceeds will be used to increase financial flexibility, raise the company’s public profile and facilitate access to public equity markets the prospectus says.

MTN Group is the largest shareholder in Jumia Technologies, and the telecoms company plans to sell shares through Jumia’s IPO to raise $600 million intended for debt payment. At its full-year earnings presentation last week, MTN identified Jumia as one of a number of e-commerce assets that could be sold as part of a 15 billion rand ($1bn) asset-disposal plan. 

About Jumia

Jumia sells items ranging from wall clocks to smartphones to clothing from brands like Zara and local designers including David Wej. Jumia also offers food delivery, travel booking, and other services.

Jumia was founded in 2012 as Africa Internet Group and is headquartered in Berlin, Germany.

Watch The Jumia Story on YouTube

Shareholders include:

  • Berlin-based incubator and venture-capital firm Rocket Internet SE owns 20.6%.
  • South African company Mobile Telephone Networks Holdings Ltd. owns 29.7%.
  • French insurer Axa CS 
  • French telecoms company Orange SA 
  • Goldman Sachs Group Inc.,
  • Millicom International Cellular SA.

Being registerd in Germany Jumia has a dual-board system: a management board and a supervisory board.

The management board, which is responsible for day-to-day operations includes ex McKinsey managers Jeremy Hodara and Sacha Poingnonnec, co-founders of the company who have served as co-chief executives since 2012. Antoine Maillet-Mezeray, the company’s chief financial officer, joined in 2016 and is tech veteran.

The supervisory board has eight membera and which is charged with keeping the management board in check. The board includes Gilles Bogaert, chief executive for EMEA and Latam for Pernod Ricard SA and Andre Iguodala, an NBA player on the Golden State Warriors.

Jumia had 81,000 active sellers by the end of 2018. The active sellers are defined as a retailer who received an order on the Jumia marketplace within the previous 12 months. There were four million active shoppers, who are customers who placed an order in that same time period, up from 2.7 million active shoppers the year earlier.

“We possess extensive local knowledge of the logistics and payment landscapes in the markets in which we operate, which we consider to be a key component of the success of our company,” “In addition, we take full advantage of the mobile-centric aspects of the African market by having adopted a ‘mobile-first’ approach in our product development and marketing efforts, which allows us to expand the audience for our goods and services, increase engagement and conversion and reduce our consumer acquisition costs.” the prospectus reads

Gross merchandise volume in 2018 was 828.2 million euros, or about $938.0 million, up from €507.1 million the previous year. Revenue for the year was €130.6 million, or about $147.9 million, up from €94.0 million the year before. The company however has not yet made a profit.

Potential Opportunities in Africa

The company is active across six African regions covering 14 countries that account for 74% of African consumer spending, according to the prospectus. Potential is the game here as in 2018, online retail accounted for less than 1% of total sales for the countries where Jumia operates.

Jumia Markets

Projected GDP growth for Africa is estimated at 6% for 2019. The middle class is growing and is expected to reach 42% of the population by 2060. Africa also has a growing urban population, with 59% of Africans expected to live in urban areas by 2050. For perspectivr 82% of the North American population lived in urban areas in 2018. Nigeria is expected to be the third-most populated country on the panetby 2050, after India and China.

The Risks Investing in the Jumia IPO

If you can get past risk one and two …..

1. Geopolitical risk

Jumia is operating in emerging African markets that have been at best called unstable. With that becomes the obvious risk of losing it all overnight. The more mundane risks include developing logistics, delivery and digital payment capabilities. Delivery can simply be too expensive or too time-consuming to compete with traditional retailers, and cashless payment is a long way off for the most part.

Political instability can go from government overthrows, nationalisation, price controls, currency devaluations, mandatory wage increases or a limitation of what you can sell. Terrorism and violent crime are real risks. In 2018, Jumia said one of its warehouses in Kenya was robbed of about €500,000 worth of merchandise. Boko Haram may become a threat in Nigeria, where it has disrupted the economy in the northeast of the country. Down in Kenya al-Shabaab, a Somalia-based terrorist group, executed an attack in Nairobi in January.

2. Returns and Delivery fails

A major problem is getting paid for the order as online payments are only just being introduced and many customers don’t have a bank account. The preference here is to pay upon delivery. Given the pilfering and identity theft risk the customer must be at home or work to accept the package. This is a huge problem, 14.4% of GMV in 2018 either was a failed delivery or return.

Delivery verification is also a problem when someone is there to collect.

Jumia Food Delivery.PNG

“For example, in Kenya, where approximately 95% of our consumers paid in cash or with cash equivalents on delivery in 2016, we discovered in early 2018 that €720,000 of cash payments remained uncollected in 2016, the large majority of which was never subsequently collected,” the prospectus reads.

3. Jumia has NEVER made a profit

This fact is true of many IPO’s and why many of them fail. The majority of Jumia’s revenue is from commissions paid by third-party sellers. Since inception the revenue the company has generated has not been enough to cover operating expenses. Losses in 2018 totaling €170.7 million. Accumulated losses as of Dec. 31, 2018 totaled €862.0 million.

“We expect that our operating expenses will continue to increase as we intend to expend substantial financial and other resources on acquiring and retaining sellers and consumers, growing and maintaining our technology infrastructure and sales and marketing efforts and conducting general administrative tasks associated with our business, including expenses related to being a public company,” Jumia said.

4. There is NO Dividend

“We intend to retain all available funds and any future earnings to fund the development and expansion of our business,” the prospectus said

With being a loss making company Jumia does not plan to pay a dividend ‘in the foreseeable future’. In essence you are investing (betting) on the stock going up.

5. The Inventory is almost all third-party sellers

This was true of Amazon, and yes still is for the most part. Around 90% of the items sold on Jumia in 2018 came from third-party sellers, While this puts the onus for housing inventory on these sellers there is the risk of any issues that the third-party might engage in like fraud affecting the brand. This is one of the big negatives you read on message boards, we have all heard the jokes about Nigerian emails.

The remaining 10% of items are sold directly “in order to enhance consumer experience in key categories and regions.” Jumia Logistics provides delivery and pickup via a network of leased warehouses and drop-off stations, and, in certain markets, Jumia has its own delivery fleet. In 2018, the company handled 13.4 million packages.

6. Most transactions are cash in Africa.

When we think of Amazon payments it is allmost 100% transacted via credit and debit cards or Paypal. In Africa almost all transactions are done via cash with minimal credit options. JumiaPay and Jumia One help with online transactions and payments.

More than half (54%) of the orders placed in Nigeria and Egypt during the fourth quarter were completed with JumiaPay. That may become part of the business in the future and many would see that as a huge opportunity rather than risk.

“As of the date of this prospectus, we do not monetize our payment services. In the future, we may decide to do so, including opening up our payment services to third parties.” the prospectus reads.

 There are certainly opportunities ahead for Jumia, but understand your risks before you invest.

Source: Jumia

From The TradersCommunity Research Desk

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