Some Jumia Reporting Discrepancies Explainable Through Rocket Internet Reports

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About: Jumia Technologies AG (JMIA)
by: Spades Capital
Summary

The reason for the discrepancy between the F-1 filing and Confidential Investor Presentation is actually valid.

Jumia's financials from 2014 onward are available further in this presentation.

Although the business may not be worth $25 a share, the numbers do seem real.

Jumia was recently pitched as a short by Andrew Left of Citron Research for the following main reasons:

1. Material Discrepancies between a Confidential Investor Presentation from 2018 and the F-1

Left describes multiple ways in how some of the numbers from both sources differ. There is, for example a large difference (2.1 versus 2.7 million active consumers reported for 2017 in both the Confidential Presentation and the F-1, respectively).

Here is the table taken directly from his presentation:

2. Co-CEO Hodara is profiting from personal transactions

"Jumia sold four of its subsidiaries to Hodara for 1 euro each...Jumia reacquired these businesses from Hodara for an undisclosed price." Furthermore, Jumia also acquired Hodara's 49% stake in Jumia Facilities, which is based in Dubai for an undisclosed price (Jumia owned the other 51%).

3. Ernst & Young Audit - No Opinion

E&Y didn't audit Jumia's financial controls and ended up providing no opinion on the matter. Left also mentions that "the issue is that US regulators can't check the audits of these foreign accounting firms such as Nigerian auditors."

4. High Order Cancellations

The company failed to disclose (in the F-1) that 41% of its order were either returned, not delivered, or canceled. Considering Jumia discloses in the F-1 that 14.4% of orders either had failed delivery or were returned, this means that over 30% of orders were cancelled.

Response to the Short thesis & New Source for Historical Financials:

1. Material Discrepancies between a Confidential Investor Presentation from 2018 and the F-1 are justified

Investors in Jumia can obtain a look-through at its historical financials using Rocket Internet's annual reports! Using Rocket Internet's annual reports one can see that the discrepancy in the numbers from the F-1 and Confidential Presentation come from the fact that the Confidential Presentation's active consumer numbers are net of returns and failed deliveries (still not net of cancellations). In the F-1, the active consumer numbers are irrespective of whether the purchase was cancelled, returned, or not delivered, as can be seen by the definitions used in the F-1:

On page 47 of Rocket Internet's 2017 annual report, we can find the key performance indicators showing active consumers for FY 2017, as 2.2 million. I am considering this 2.2 essentially matches the 2.1 number in the Confidential Presentation described by Citron. When reading the footnotes for the 2017 annual report, we first go to footnote 6 which defines active consumers as the "number of customers having made at least one order as defines in 'total orders' within the last 12 months before end of period." Then we look at the definition of 'total orders' which is found in footnote 5 as the "total number of valid orders placed on the platform within the period."

The term 'valid orders' is defined on page 47 of Rocket Internet's 2016 annual report in footnote 5 as "not failed or declined". Again, please note that valid orders still include cancelled orders, which they subtract for in the 2016 numbers, being the reason why the total transactions in 2016 do not match the total number of transaction for 2016 reported in 2017, meaning that the difference of 0.8 (4.9 minus 4.1) is coming from cancelled orders.

Now, in 2018, Rocket Internet shows Jumia's active consumers irrespective of cancellations or returns on page 39, which directly matches the reporting in the F-1.

To summarize this argument, in 2016, Jumia reported numbers net of cancellations, returns, and failed deliveries. In 2017, they reported numbers net of returns and failed deliveries, but not cancellations. Lastly, in 2018, (both the F-1 and Confidential Presentation), the began reporting numbers gross of returns, failed deliveries, and cancellations. They are not reporting fraudulent numbers, they are just consistently changing the way they are reporting the numbers. It is possible that this is the only way they can show growth in the business, and so its revenue growth rates may be a much better indicator of growth than the other performance indicators Jumia is reporting now.

2. Co-CEO Hodara is supposedly not profiting from personal transactions

According to a Financial Times report on Jumia, Co-CEO Poignonnec has stated that his partner "'did not profit from these transactions.'" From an investor perspective, it would be much more comforting for the company to simply disclose the prices at which all of these transactions are going through, but it does not seem like Jumia will be doing so any time soon.

3. Ernst & Young Audit - No Opinion - But they did say it is "fair"

Although E&Y claimed no opinion on the company's financial controls, they did state in the F-1/A that "In our opinion, the consolidated financial statements present fairly in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2018, in conformity with International Financial Reporting Standards as issued by the International Accounting Standard Board." Additionally, the auditor is not a "Nigerian auditor", but in fact, a Luxembourg-based office of E&Y.

4. High Order Cancellations do pose a huge risk to investors

The company has stopped reporting cancellations since filing publicly, but the cancellations have been alarmingly high. The reason for high cancellations, returns, and failed delivery rates is most likely that it is a part of doing business in Africa. For example, over 95% of transactions in Kenya were based on cash payments. As a result, a lot of the time the goods are delivered with no one there to accept them or pay for them. However, the fact that GMV and Active Consumer growth was 58% and 43%, respectively, this quarter is alarming considering revenues only grew 12%. It is possible that a lot of the GMV and Active Consumer growth was actually driven by fraud (fake accounts and cancelled transactions which are not translating to any revenue growth).

Investors would find more comfort in buying Jumia shares if the company began disclosing GMV, Active Consumers, and Total Orders numbers net of cancellations, refunds, and failed deliveries, but it is likely that the company is not doing so because then the company would not look very good on paper anymore.

Conclusion

Although the company is not fraudulent in regards to the points Citron Research provided, investors cannot put much trust into current GMV and active consumer numbers considering 40% of orders are either returned, cancelled, or not delivered. On the other hand, the fact that the company is experiencing revenue growth, and specifically high growth in marketplace revenues is a huge plus. Additionally, the fact that the company has become profitable on a Gross Profit minus Fulfillment Expense basis is a very good sign, and the fact that cancellations and returns are 40% may truly be an opportunity for the company, as the CEO mentioned on Monday's earnings call.

In conclusion, although the company's numbers do have some misleading characteristics, they are not fraudulent.

As promised, here are the links to the three most recent annual reports from Rocket Internet:

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in JMIA over 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.