Jumia Technologies (JMIA) CEO Sacha Poignonnec says that Citron's scathing report that included allegations of outright fraud is misleading the market.
Shares of the stock that has been proclaimed the "Amazon of Africa" surged on Monday, battling back from a Citron report that took shares down over 40% in just two days.
The stock bounce is aided by a relatively solid earnings release, the first the company has made as a public company, that reflected a 12% increase year over year in revenue alongside a 58% increase in gross merchandise volume. Active clients on the platform also leaped by 1.3 million from the prior year quarter.
However, shares remain lower than their post-IPO heights largely as a result of the suspicion fomented by the aforementioned Citron Research report authored by Andrew Left.
CEO Sacha Poignonnec acknowledged the negative reaction to Left's writing, but advised that the stock's dive was essentially built upon speculation rather than evidence. "This is taking selective bias and unverified claims to try to damage Jumia," he told Real Money in an interview. "These are essentially just market rumors rather than facts."
He added that the investor document presented in the report as the "smoking gun" from Citron isn't consistent with the prospectus in terms of calculation, thus differences should be expected.
"The prospectus and the investor document referenced are not consistent," he told Real Money in a telephone interview. "The documents are calculated differently, since the prospectus presents active consumers in the same way we present gross merchandise volume."
As to Left's allegations of self-dealing by co-CEO Jeremy Hodara, he explained that this was not in any way used as a function to garner profits for the business partner.
"Jeremy did not profit from any of these transactions," Poignonnec said. "Jumia sold these entities to Jeremy for about €3 and bought them back for about €22,000. However, Jeremy never claimed the payment [for these businesses]."
The company's filings explain the transaction further. "That transaction was motivated by our intention to cease operations in Tanzania, and Jeremy Hodara's intention to run operations in Tanzania under his sole ownership but to continue operating the Tanzanian Entities under the Jumia brand," the F-1 said. "In 2018, Jeremy Hodara expressed an interest in selling his shares in the Tanzanian entities. After taking into consideration several criteria, including the local market dynamics, the competitive situation across our East African operations and the momentum of our current business model in certain other markets that we believe are comparable to Tanzania, we entered into negotiations with Jeremy Hodara to reacquire the Tanzanian Entities. In 2017, the Tanzanian Entities generated revenues of €238 thousand and net losses of €3,088 thousand."
The losses, while large, were explained as foreseeable in a nascent market that needs significant investment before reaching maturity.
Further, Sacha Poignonnec stated that the use of payroll and support services under Hodara in Dubai were done out of necessity for compliance with Emirati law.
Under Article 10 of the UAE Commercial Companies Law, any company established in the UAE must have a UAE national shareholder holding at least 51% of the capital. As such, it was necessary to have Hodara hold a 51% stake to comply with local law.
"At the end of the day, we stand by the prospectus and believe it accurately describes the business," Poignonnec said. "I think we've addressed all of the points, and hopefully we can move on after the first quarter."
Cancellation Conundrum?
Another major piece of the allegations against the company is the concern over its cancellations and payment policies.
Jumia filings did acknowledge this issue ahead of the IPO.
"Although we have implemented various measures to detect and reduce the occurrence of fraudulent activities on our platform, there can be no assurance that such measures will be effective in combating fraudulent transactions or improving overall satisfaction among sellers, consumers and other participants," a filing stated. "Additional measures that we take to address fraud could also negatively affect the attractiveness of our platform to sellers or consumers."
The filing cited an example in which Kenyan customers fraudulently used electronic payment suppliers to acquire approximately €550,000 in goods in late 2017.
In response, the company has stated a plan to implement fraud scoring and risk monitoring processes and software. "Our in-house fraud team employs a combination of machine learning and rule sets to find an appropriate balance between acceptable risk and a high acceptance rate," the filing said. "Our focus on disciplined fraud-rrisk management through our scoring algorithms has allowed us to further reduce the share of bad debts and credit card chargebacks, while at the same time accelerating our growth."
Poingnonnec noted that these steps are relatively normal for a company starting up an e-commerce business in a market like Africa.
"The returns and cancellations are normal features in an e-Commerce business that is operating in a nascent market," he said. "There are multiple ways which we are looking to address it, one of which is JumiaPay, which is preferable to cash on delivery."
JumiaPay, the company's secure payment platform, could do a great deal to reduce fraudulent activities pursued by those keying in on cash transactions. The company recently entered into a partnership with Mastercard (MA) that gave the company €50 million from the American payment giant -- a solid endorsement amidst the noise.
Authentically African?
One other troubling aspect for Jumia has been the backlash from both traditional African media and social media, which has called the company out for not being based in Africa.
The hashtag, #JumiaIsNotAfrican has become a popular refrain on Twitter (TWTR) to highlight the criticism.
Jumia will never succeed in Africa. They have a messed up business model. Nt market leader in most of the countries they operate in. Customers hate them. And Africans have totally rejected the idea that Jumia is African. They are a @RocketBerlin venture. Check #JumiaIsNotAfrican
— Rebecca Enonchong (@africatechie) May 9, 2019
"It is something which a few people say, but we have 5,000 employees exclusively focused on making a platform tailored to the African consumer," Poignonnec said. "We operate exclusively in Africa and are dedicated to improving eCommerce on the continent. That's what is important to us."
Indeed, a Boston Consulting Group report published in March backs up the positive impact Jumia could have on the African continent in terms of employment.
"In developed economies, where labor laws and regulations are clearly defined to fit a historically validated model, the rise of online platforms has disrupted labor markets by blurring the lines between employees and freelancers," the report acknowledged. "In Africa, however, the vast majority of workers are in the largely undocumented informal sector. Seventy-one percent of Nigerian workers are self-employed, for example, and another 9% contribute labor as family members, according to the International Labour Organization."
"As a result, much of Africa is in a position to essentially develop from scratch labor norms that align with the needs of online employees and employers," the report adds. "In the long run, bringing more people into the formal workforce will help governments enforce regulations, better measure economic activity, and improve taxation. For workers, formal employment will provide the documentation they need to take out mortgages and personal loans and to verify their skills and experience."
The influx of employment generators like Jumia are a necessity as population growth accelerates on the continent as well.
"In Africa, the youth constitutes about 37% of the total labor force, but make up about 60 percent of total unemployment," a report from the African Development Bank stated.
As youth population increases, this could be a worsening crisis on the horizon, unless employment at growing enterprises like Jumia can stem the tide.
"Our research indicates that online marketplaces will create around 3 million new jobs in Africa by 2025-roughly one for every 150 unemployed Africans or one for every 15 unemployed workers aged 15 to 24," the BCG report reasoned.
As to the question of the company's European incorporation, Poignonnec lamented that this was merely circumstance. He explained that the company is only domiciled in Germany due to its early investors, which were based in Europe.
As Citron continues to double down on its calls of fraud and the company's shares continue to trade in a volatile manner, the stock will likely continue to be a difficult one for investors. At the very least, now investors can observe the argument from both sides.
