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Claims by Citron Research that the stock is worthless, Poignonnec said, rest on “selective, biased and unverified information.” Citron used key performance indicators which are not comparable with those used by the company, he said.
Asked if he would take legal action against Citron – which, after all, has publicly accused Jumia of fraud – Poignonnec said that the company is considering its options and will report back to shareholders.
Jumia’s auditor EY stated in the IPO prospectus that it was not required to express an opinion on the company’s internal control over financial reporting, and therefore did not do so.
- Poignonnec said that it will be perfectly possible to perform an audit of internal controls over Jumia’s financial reporting.
- The company is working on a system that will be reviewed by EY, and he expects EY to be able to give an attestation to the effectiveness of the system in 2021, in line with US SEC rules.
- Statistics about the high return rates, which are to be expected in nascent e-commerce markets, were disclosed and not removed from the IPO documentation, he said.
- Poignonnec added that the salesforce in Nigeria is incentivized based on transactions after cancellations and returns. where purchases are usually paid for on delivery.
- There are “penalties and extra incentives” to avoid cancellations, he said. Jumia, he said, is effectively relying on its incentive scheme to avoid fraud.
In addition to the Citron attack, the list of risks that Jumia shareholders are running is formidable, and includes the absence of a timetable to profitability.
Asked about when the company aimed to break even, Poignonnec said that, while the company is making progress on cost-effectiveness and monetization, “we don’t publish long-term forecasts.”
Analysts, however, have tried to peer into the future. Jumia will need to rapidly grow gross merchandise volume while controlling expenses to be able to break even by 2023, Citi argued in research in March.
- While such a goal is possible, investors “are likely to be sensitive to any major deviation from this path to profitability.” Citi wrote.
Morgan Stanley on May 7 estimated that only 50% of currently active Jumia buyers return to the platform within 12 months. The company will only post a profit at the EBITDA level (earnings before interest, taxes, depreciation and amortization) in 2024, and will have positive free cashflow in 2027.
- Even those distant targets are likely to require the company to raise further capital from the market in 2021, Morgan Stanley says.
That implies the market is effectively making a circular bet on its own future confidence in the company, the assumption being that Jumia will be able to raise new financing as losses continue. That was the spirit of the Internet Bubble markets of the late 1990s – and for every Amazon, there were many more companies that never made it.
Bottom Line: If Jumia manages to weather the Citron storm, don’t be surprised if it comes back to the market asking for more capital – and diluting existing shareholders in the process.
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