Jumia fraud disclosure raises red flag on credibility as share price drops
The recent fraud allegation leveled against Jumia, the Africa’s largest eCommerce platform operating in fourteen countries raises three questions, said Tellimer, a developing markets financial institution.
On the account of its alleged listing fraud and most recently, sales fraud perpetrated by its Nigeria’s agent network, investors dumped the company shares as Jumia confirms that there are ongoing Class Action Lawsuits against the company.
However, the sell-offs has forced the stock price to have declined by 33% against its previous record.
Meanwhile, Tellimer stated that the fraud revelation admitted to by the management damaged Jumia’s reputation.
The eCommerce company is currently operating in 14 countries in Africa including Nigeria, Kenya, Ghana, Algeria, Angola and Senegal.
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, Tellimer reckoned.
The company which was listed on the New York Stock Exchange (NYSE) in early April saw its share price almost tripled in the first three days, but since then euphoria has been replaced by doubt.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.
At the earnings call, the management admitted that its Nigeria sales force, JForce – its network of commission agents, engaged in fraudulent sales practice. The impact is limited to 1% of the company’s gross merchandise value (GMV), Jumia stated.
The improper sales practices, the company said were carried out by its own personnel in its network of commissioned agents.
Tellimer stated that 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: How material is Jumia’s fraud? The improper orders were EUR16 million or its equivalent of US$17.5 million in gross merchandise value (GMV) in between fourth quarter of 2018 and second quarter of 2019.
“This accounts for 2% of GMV in 2018 and 4% of GMV in the first quarter of 2019. The fake orders are a much larger proportion of Jumia’s gross profit.
“Gross margins are typically about 6% of GMV. This suggests that about two-thirds of the gross profits in the first quarter of 2019 were tainted.
“In a slim margin and negative cash flow business, fraudulent orders have a high degree of materiality”, the London based investment banking firm noted.
Analysts seek to know how this discovery would prevent further instances. It noted that Jumia has fired the employees and agents involved, and an investigation has been launched.
To Tellimer, a more pressing concern is the corporate governance risks. It stated that Jumia needs to demonstrate that its platform is not completely tainted. It needs to demonstrate systemic safeguards against similar occurrences.
However, the firm asked if the fraud case admitted by Jumia 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, the ecommerce platform 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 cash flow-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”, Tellimer reckoned.
The developing markets financial institution stated that Jumia is highly cash flow negative.
“At the current burn rate, Jumia’s cash levels will be low in financial year 2021 and, by 2022 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”, Tellimer said.
Jumia fraud disclosure raises red flag on credibility as share price drops BY Michael Oluwafemi