When e-commerce platform Jumia listed in New York last month it was heralded as Africa’s first unicorn to go public. At a listing price of $14.50 per share, the company came to market with a market capitalisation of $1.17 billion (R16.78 billion).
With four million customers in 14 countries, Jumia is the largest e-commerce company in Africa. Given that there are 400 million Africans with smartphones, it believes it has enormous scope for growth.
Many investors seem to share this excitement. The stock was up 75% in its first day of trading and is currently changing hands at over $30. That is a gain of more than 100% in under a month.
Buying a promise
Like a number of recent tech listings, however, Jumia has never turned a profit. As at December 31 2018 it had accumulated losses of nearly $1 billion (R14.4 billion).
“When you look at Jumia, you are not buying execution,” Adventis portfolio manager Jonathan Kruger told the Afsic 2019 Investing in Africa conference in London this week. “They are selling the dream. You are largely buying forward earnings – the promise that management [is] going to execute and deliver.”
In an era of excitement over the growth possibilities of tech platform companies, there are plenty of investors willing to buy that promise. However, not everyone is as willing to buy the stock of a company that is some way from profitability.
Kruger is one of them. He is looking for quality companies trading at a discount to their intrinsic value, and Jumia certainly doesn’t tick the latter box.
Enthusiasm for an African asset
That doesn’t mean he doesn’t see positives in the listing. Even though Jumia has its headquarters in Germany and its founders are French, it operates exclusively in Africa. CEO Sacha Poignonnec is adamant that it is an African company.
The enthusiasm from investors is extremely encouraging for anyone who believes in Africa’s economic potential. It is recognition of the opportunity the continent presents.
“I’m certainly hoping that Jumia is able to execute,” says Kruger.
It is also significant for other reasons. As Daniel Szlapak, head of global operations at fintech company Branch International, points out, private equity firms have not historically been able to earn high prices for African companies when they wish to sell out of them. However, at a listing value of over $1 billion and revenue of just $150 million, the multiple investors were willing to pay for Jumia is high.
“Finally the markets now see that the African opportunity is real because there has been this massive tech IPO,” says Szlapak. “That is super exciting. I do think that this is Africa’s turn. I do think that we are going to see many more successful exits.”
More to come?
The value this has realised for the existing shareholders might also stir action from the management teams of other African companies that have extremely valuable businesses that are either unlisted or are currently bundled into other listed entities.
“I think Jumia is crazy overpriced, but how fantastic that you have a stock that can double in price in a month,” says Peter Leger, head of global frontier markets at Coronation.
He suggests it could be a catalyst for investors to approach a company like Safaricom and ask why its M-Pesa mobile money service is still held within the “old school” business instead of being spun off. If it commanded a similar multiple, this would create enormous value for shareholders.
This is also not the only example. Leger believes there is a lot of value in African businesses that the Jumia listing shows could be realised through the equity market.
“There are some first world, quality business that are highly profitable, but are stuck in old assets and not showing their value,” he says. “In time, a Jumia will force boards to address this.”