Choppies is the smallest “supermarket” or grocery retailer listed on the JSE — measured by turnover as well as market value.
But it’s not a tiny business, with annual turnover this financial year looking set to exceed R8bn (remember the Botswana pula is stronger than the rand at present).
At one stage Choppies’ market value was also a lot bigger. When the group listed in mid-2015 — by placing shares at 490c — the market value was more than R6bn.
Unfortunately, not too long after listing Choppies found itself in an auditing dispute. This led to the share being suspended on the Botswana Stock Exchange and the JSE. Though Choppies was not operationally compromised the incident wrecked sentiment and the share price dribbled away.
Legal costs pretty much crippled the balance sheet, which cast a pall over the company’s operating performance. It’s never easy to look at a balance sheet where liabilities exceed assets, even if there are decent operational cash flows.
Those morbidly fascinated by what transpired can find reams of Sens announcements about the dispute. IM would prefer to look at Choppies with an eye to the future.
In short, Choppies — courtesy of a P300m rights issue — has been recapitalised. The interim balance sheet to end-December now shows equity of P120m — a far more reassuring position compared with end-December 2022, when the balance sheet showed negative equity of R270m.
Now it’s possible to pay full attention to the income statement — which showed gross profit of P893m earned on a margin of more than 20%. Operating profit before interest came in at P183m, representing a fairly respectable margin of 4%.
Net cash generated from operations was R338m — which gives some underpin to, what IM thought, was an unexpected resumption of dividend payments.
Choppies still earns the bulk of its keep in Botswana with P2.54bn of sales generated in that country. Another P636m of sales stems from Zambia, P293m from Namibia and P277m from Zimbabwe. Choppies no longer operates in South Africa.
What is encouraging is that the Liquorama business chipped in sales of P482m, and IM would expect this contribution to grow steadily in the years ahead.
The core Botswana business looks quite robust, despite a challenging economic environment (such as the one retailers have experienced in South Africa). Sales in Botswana jumped 9.4% (6.7% on a like-for-like basis) with volume growth and price inflation helping.
Ebitda and adjusted ebitda from the Botswana operations increased 19% and almost 20% respectively with Choppies managing to keep a lid on costs.
Directors attributed the sprightly profit performance to “good in-store execution and improved customer engagement” as well as benefiting from the inventory optimisation system.
Despite continued competition from retailers and wholesalers, Choppies Botswana managed to improve gross profit margins by 60 basis points.
Elsewhere Namibia looks promising for Choppies (in spite of renewed competition), while Zambian operations continue to grow steadily. Zimbabwe is a good deal trickier with revenue and profits taking a steep dive. Zimbabwe is still profitable, but IM has to ponder the wisdom of pressing on in the economically distressed country.
Interestingly, Choppies directors make no pronouncements on second-half or medium-term prospects.
Of course, the interim dividend speaks volumes. In this regard the directors did note: “This interim dividend is the first dividend since financial 2017, marking a key milestone in the performance of the group and the return of value add to shareholders.”
Since the release of the interims and the surprise dividend declaration, the market has not shown any real signs of enthusiasm for Choppies. The share is closer to its 12-month low than its 12-month high.
This is probably not terribly surprising. The local market remains sceptical on small-cap stocks and even more jaundiced on microcaps — especially ones that have courted controversy (even if it was not of their own making).
Choppies seems capable of doing at least another 5 thebe a share or close to 7c a share in the second half of the 2024 financial year. That would put Choppies on a forward earnings multiple of just over four times, and a potential yield of about 8%.
Not a bad price for an option on a fairly vibrant recovering retail niche player that one suspects, over time, might well drift into the sights of the larger retail enterprises in Southern Africa.
*The writer holds shares in Choppies
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