Jumia: Africa's First Billion-Dollar Unicorn Files For Its IPO

Summary

• African e-commerce company, Jumia, just filed for a $100m IPO on the NYSE, but will probably seek even more funding.
• The companies revenues are growing, but it's still unprofitable.
• Jumia is sometimes called the Alibaba of Africa. Does it live up to it's name?
• China's tech IPOs are all the rage, but could Africa could be a great opportunity too?

Introduction

According to documents filed on March 12th, Jumia (NYSE:JMIA), Africa's first company with a $1B+ valuation, is planning to raise $100,000,000 via IPO on the NYSE. Many see this as a good way to enter the hot African tech market, and bank on the continents economic growth. However, investing in Jumia's IPO doesn't come without its share of risks and considerations. Let's discuss.

The Company

Jumia is an African ecommerce company that is very similar to Alibaba (BABA) of China, and MercadoLibre (MELI) of South America. They are the the leading pan-African e-commerce platform and offer a B2C marketplace, logistics service and payment service, each with major potential for growth.

The company was founded in 2012 by Jeremy Hodara and Sacha Poignonnec, two ex-McKisney employees, along with Tunde Kehinde and Raphael Kofi Afaedor, and backed by Rocket Internet (OTC:RCKZF) (they own 21.7% of the company). The largest shareholder is MTN Group Ltd., a telecoms company.

In 2016, it garnered "Unicorn Status", after Goldman Sachs bought a bought a stake and valued at about $1.2 billion. Now in 2019 they are breaking records again -- this time the first African tech startup to list on a major global exchange.

Headquartered in Nigeria, they operate in 6 regions and 14 African countries, including Kenya, Ghana, Ivory Coast, Egypt and Morocco.

The vertically integrated company offers three main services (with dozens of sub-services): A B2C Marketplace, a Logistics Company, and a Payments Platform.

Marketplace (Link)

The B2C marketplace allows African sellers to connect with consumers across the continent. It follows a "middleman" mentality; over 90% of sales were by third parties who manage their own inventory. The remaining 10% is sold directly by Jumia in key categories and regions.

(Marketplace.)

On the marketplace, they had a total of 81,000 Active Sellers and 4 million Active Consumers as of December 31, 2018.

(Share of items sold by category in 2018. Source.)

In addition to goods, the company also offers flight and hotel bookings (like Kayak), Classifieds (like Craigslist) and local food delivery (like DoorDash).

Jumia takes a commission off every third party sale. For first party sales, they strive for positive gross margin.

Logistics

Jumia Logistics forms a network of leased warehouses, pickup/drop off stations for consumers and sellers and over 100 local third-party logistics service providers, whom they integrate and manage through proprietary technology, data and processes. These third parties are usually used for last mile, country specific delivery of goods.

(A Jumia Warehouse. Source.)

In 2018, Jumia Logistics handled 13.4 million packages, and over 92% of deliveries in 2018 were made by fully integrated partners using their technology and processes.

(Source.)

In the future, Jumia states that they intend to offer logistics services to parties that do not transact over their marketplace.

Payments

JumiaPay enables sellers and consumers to transact using a diverse variety of payment methods for transactions conducted on marketplace. The company launched JumiaPay in 2016 in Nigeria and in 2018 in Egypt and, more recently, in Ghana and Ivory Coast through agreements with locally licensed sponsoring banks.

The IPO Filing goes into more detail: "We are integrating the most relevant payment methods and have built a one-stop payment service. Consumers have responded with a very rapid adoption of JumiaPay. In two of our largest markets, Nigeria and Egypt, 54% of orders placed on our platform were completed using JumiaPay in the fourth quarter of 2018."

Jumia also offers the JumiaOne mobile app in both Nigeria and Egypt. With it, users can create a digital wallet, integrate several payment types, and more.

Regarding the app, Jumia says this:

We have built our app to collect, store and use data, with the perspective to integrate financial services for consumers. Through our app, we are able to track consumer acquisition, purchase and payment behavior, and use this data to improve credit scoring of our consumers, cross- and up-sell our services and personalize the consumer experience.

The IPO

While Jumia filed for an IPO on March 12th, 2019, there's no pricing date. In the filing, management states that they will use the IPO to "increase our financial flexibility, increase our public profile and awareness, create a public market for our ADSs and facilitate our future access to public equity markets. We have not quantified or allocated any specific portion or range of the net proceeds to us for any particular purpose."

Financial Performance & Other Metrics

Over the past few years, the company has seen a lot of growth.

(Source.)

As of December 31, 2018, they had 4.0 million Active Consumers, up from 2.7 million Active Consumers as of December 31, 2017. GMV was €828.2 million in 2018, up from €507.1 million in 2017. (GMV is the primary driver of Jumia's revenue.)

Revenue was €130.6 million in 2018, up from €94.0 million in 2017.

Despite this, the company doesn't turn a profit. Consolidated operating loss increased from €154.7 million in 2017 to €169.7 million in 2018. However, as a percentage of GMV, consolidated loss for the year decreased from negative 32.6% in 2017 to negative 20.6% in 2018.

(Financials. Source.)

(Source.)

While on the path to long term profitability, don't expect to see green numbers in the next few years. In its filing, Jumia states that:

The Group expects to continue generating losses in the coming years as it makes the necessary investments to grow its business and extend its geographical footprint. The Group will therefore continue to require significant funding either from existing or new shareholders.

Growth Potential

Because of Jumia's geographic positioning, there's a lot of potential for growth. Africa’s GDP is expected to grow by 6.0% in 2019 and at a 5.9% compound annual growth rate from 2018 to 2023, according to the IMF. In 2010 355 million people, or 34% of the population, were considered “middle class” according to the African Development Bank. By 2060 that number is expected to grow to 1.1 billion people or 42% of the population, representing an average annual growth of approximately 15 million people.

Rocket Internet, an early investor in Jumia, states that the company has a current addressable market of over 400 million consumers.

Infrastructure, a barrier to growth (see risks section), is ever improving with over $100 billion being invested into the continent in 2018. In that year, China alone renewed another financing commitment of $60 billion to Africa. As physical infrastructure improves, ecommerce becomes more accessible and practical to consumers, which will lead to increased revenues for Jumia.

African population demographics will also play a major role in Jumia's growth. The average age for the continent is about 19 years, and half of the world’s population growth between 2015 and 2050 is projected to be driven by Africa. Nigeria alone (Jumia's HQ, and largest source of revenue) is expected to have a population of 411 million in 2050, and to be the world's third most populous nation. It's expected that this young "online" generation will be able to adopt ecommerce quickly and loyally as it becomes more accessible.

(Source.)

It's not just ecommerce, though. Both the logistics and payments services each have major growth opportunities, too.

Logistics

Jumia is working to build a continent-wide logistics service. While only available for their marketplace, the company will offer it to other vendors in the future. This has major growth potential, because currently there is no continent wide logistics network. Jumia provides logistics from origin to destination, and with over 100 last mile logistics partners, has a very valuable asset. By strategically offering this service to international companies, they can drive growth in revenue both by shipping more product, and listing more items on their marketplace.

Payments

The payment platform that Jumia is creating should be extremely exciting for investors.

The company itself states that "the African banking and payment landscape is characterized by a high degree of fragmentation of financial institutions and service providers, a general lack of infrastructure, low consumer trust and high perceived levels of fraud."

At the same time, the use of smartphones to access online banking (and online banking itself) is expanding. According to Bloomberg, Sub Saharan Africa is the world leader in mobile banking:

Jumbia has "developed an advanced and sophisticated payment infrastructure, including our own eWallet, which integrates our payment and certain financial services relevant to our sellers and consumer."

On the topic of future growth, the company states this:

We intend to continue to add more payment options and enable consumers to access a number of other financial services provided by third-party financial institutions in the medium- to long-term, and we intend to integrate JumiaPay with other companies, particularly those located outside Africa, as well as other local start-ups, and allow our consumers to make payments to third parties through their accounts. The integration of further payment options and addition of financial services positions us to charge additional commissions.

Jumbia's presence in the ever growing payments sector will be a major driver of future growth. They are the leading platform for payments already, and will only grow as Africa's economy expands and globalizes. This segment of the company is extremely similar to the early Ant Financial, Alibaba's financial services company in China.

In addition to the provided services, the company (like Alibaba and other ecommerce giants) has access to consumer data, which is really valuable. A visual provided in the IPO filing illustrates where the data comes from, and what Jumia can use it for:

(Source.)

Risks and Issues

There are several unique points that investors need to consider when considering an investment in Jumia, and in turn Africa.

1) Lack of physical infrastructure

This is one of the major reasons Amazon and Alibaba haven't attempted entering Africa. There's a lack of paved roads, postal addresses and a major courier service. It's difficult to get a package from one major city to another, which could limit growth. In their IPO Filing, Jumia notes these issues:

This underdeveloped infrastructure restricts and complicates the movement of people and goods, which may make our delivery service too expensive or our delivery times too long to effectively compete with offline stores, in particular outside of main urban centers. Underdeveloped infrastructure may also limit our growth prospects by obstructing access to potential consumers.

2) Lack of financial infrastructure

Payment providers in Africa are highly fragmented, and change from country to country. "Lack of an established, secure and convenient cashless payment system in many markets also poses significant challenges for sellers," states Jumia in the filing.

Additionally, the majority of Africans do not have bank accounts. A Bloomberg report states that "43 percent of adults had an account last year [2017], compared with 34 percent in 2014."

At the same time, this potential risk is a potential opportunity - In China, Alibaba took this opportunity, and created Ant Financial, now the largest payment provider in Asia.

Jumia already has a financial processing offering and with the proper maneuvering, it could position itself as the leading payment processor for the continent.

3) African geopolitical and geographic risk

Many investors look at the African continent as one entity, but in reality there are dozens of countries, each with their own laws, currencies and customs. Africa is also politically unstable, and we see this as the largest risk to investors. Jumia discusses this in their filing:

Frequent and intense periods of political instability make it difficult to predict future trends in governmental policies. For example, the Arab Spring of 2010 and 2011 caused substantial political turmoil across the Middle East and North Africa, particularly in Egypt. During this period of instability in Egypt, the government temporarily dissolved the parliament, suspended the constitution and shut down the internet. As we were founded only in 2012, this temporary shut-down of the internet did not affect us. Any similar shut-down in the future will, however, negatively affect our business and results of operations.

African governments can also incorporate major policy changes quickly, which would adversely impact Jumia's operations. Additionally, the majority of African currencies unstable, and experience large inflation, year after year. "The inflation rate in Nigeria increased to 11.2% in August 2018 from 11.1% in July 2018, while decreasing year over year from 16% in July 2017," states the company. Other currencies follow suit.

Though these are the three largest risks that you should know and understand, there are several others. Before considering investing, you should review the filing and know and understand the risks.

Conclusion

Investors should pay close attention to the news surrounding Jumia's upcoming IPO. Keep an eye out for pricing information, and valuation metrics.

While it comes with it's fair share of risks, the company has several major opportunities for growth, and could be a good investment in the future of African ecommerce.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.