South Africa’s largest pharmaceutical manufacturer, Aspen Pharmacare, may have announced a relatively tepid set of annual results for the year ended 30 June 2019, but the anticipation of a reduced debt load freeing up cash flows pushed its share price up 12% the day after its results announcement.
Jumia pain may not be over as shares slump below IPO price
The decline in Jumia’s share price has accelerated since the African e-commerce platform said on August 21 that sales consultants in Nigeria had been involved in placing improper orders which were then cancelled.
The pain may be far from over for investors still holding shares in the company billed as the “Amazon of Africa” when it made its IPO debut in New York in April.
The Africa Report argued at the time of the IPO that establishing a fair value for Jumia shares would be a painful process, and pointed to the private valuation of e-commerce rival Konga, which was bought by Zinox in 2018. The price paid by Zinox was never disclosed, with reports ranging from $1 to $230m.
Jumia has traded as high as $49.77 a share in what may become a textbook example of irrational stock-market exuberance. The shares now trade at around $11, compared with the IPO price of $14.50, which gives the company a market value of about $867m.
“There is no real oversight at Jumia and investors should not feel confident,” says Andrew Left, the Citron Research short-seller in Los Angeles who has argued that the stock is worthless. “I hope Jumia is genuine in their efforts to clean up shop.”
Since Citron published its report on May 9, Jumia shares have lost two-thirds of their value.
The improper orders, Jumia says, amounted to about 4% of gross merchandise value (GMV) in the first quarter of 2019, before declining to 0.1% in the second quarter.
- The transactions had no impact on Jumia’s financial statements.
- The company has suspended or terminated employees involved and says its review of the matter continues.
The financial impact of such revelations may be less important than the loss of confidence in a company that was unable to detect the improper practices before its IPO.
- The company now faces a series of class action lawsuits in the US from investors who claim they were misled.
- “There needs to be an outside audit of Jumia’s operations,” argues Rebecca Enonchong, founder and CEO of AppsTech.
- “I don’t think anyone would agree that management’s review is sufficient,” she says.
Jumia, which has yet to turn a profit, still has its defenders among analysts. Berenberg rates the shares buy with a price target of $45 and argues on August 22 that the company has “huge potential for long-term growth and profitability.”
- Jumia has put in “seven years of ground work that cannot be quickly replicated by a third party, regardless of how much money it can deploy,” Berenberg analysts wrote.
- The quantification of the sales practices risk is “positive, given how small the exposure is,” Berenberg argued.
- Note, though, that Jumia was a client of Berenberg Capital Markets in the 12-month period before their report.
Nirgunan Tiruchelvam, head of consumer equity research at Exotix Capital in the United Arab Emirates, is more pessimistic.
- He argues that investors remain “concerned about the corporate governance risks, despite the action that has been taken.”
- Tiruchelvam rates the shares a sell with a target price of $10, arguing that Jumia needs to find a way to generate more cash.
Jumia did not respond to a request for comment.
Bottom Line: The balance of risks is still loaded against investors holding shares in an early-stage, loss-making company that has yet to prove its internal controls.
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