Choppies Group (BSE: CHOPPIES) (JSE: CHOP)
Choppies Group (BSE: CHOPPIES and JSE: CHP), referred to as “Choppies” for the remainer of this writeup, is a high return on capital grocery store chain based in Botswana with additional locations in Namibia, Zambia, and Zimbabwe. It offers groceries primarily through three different store formats: Hyper, Super, and Value. Per p. 28 of the 2023 Annual Report, Choppies purpose is to provide great value to customers. Its vision is to be the preferred retailer for mass grocery and financial services in the countries in which it operates and its mission is to be the preferred one-stop-shop community hubs in the countries in which it operates. The business generated BWP 6.433 billion in sales in FY 2023 and BWP 4.258 billion in sales through HY 2024. Choppies is headquartered in the mean streets of Gaborone, Botswana.
History
Choppies was founded in 1986 as Wayside Supermarket in Lobatse, Botswana. A second store was opened in 1993. The business continued to grow, and all stores were rebranded as Choppies in 2003. Choppies went public on the Botswana Stock Exchange (BSE) on January 26, 2012, and completed a secondary listing on the Johannesburg Stock Exchange (JSE) on May 27, 2015. Per Wikipedia, Choppies IPO in Botswana was the largest in the exchange’s history up until that point in time and shares were oversubscribed by 400%.
CEO
Choppies CEO is Ramachandran (Ram) Ottapathu. Per the 2023 Annual Report, “Ramachandran is a fellow member of the Institute of Chartered Accountants of India and fellow member of the Botswana Institute of Chartered Accountants. He has played a key role in the growth of Choppies both in the local Botswana market and in the international market having joined Choppies in 1992 and has been heading operations since 2000. He has over 34 years’ experience working in finance and operations in various sectors such as manufacturing, packaging, milling, real estate developments and medical distribution.” From my readings and research, I believe Ram maintains an iron grip on the business.
For full transparency, Ram was named in the Pandora Papers back in 2021. He and two business partners set up a shell company in the British Virgin Islands called Covering Concepts Global Limited. As of October 2021, one of the other two business partners stated that the company was working on removing Ram from the business and paying his money back. He was not accused of any kind of crime or wrongdoing, but I do think this was worth mentioning. A full article about Mr. Ottapathu and his Pandora Papers leak can be found here.
CEO Compensation
Mr. Ottapathu’s compensation is comprised of “Guaranteed Remuneration”, a short-term incentive plan (STI), and a long-term incentive plan. The long-term incentive plan was implemented within the last two fiscal years and Mr. Ottapathu elected not to receive it both times, so I will not describe it further.
His “Guaranteed Remuneration” is comprised of a salary, retirement plan, medical/insurance, and a housing and vehicle benefit. Mr. Ottapthu’s Guaranteed Remuneration was BWP 6.965 million in FY 2023 and will be the same for FY 2024.
The Short-Term Incentive Plan is shown in the two screencaps below which were taken from p. 92 of the 2023 Annual Report.
The Short-Term Incentive performance conditions have changed a bit over the last few years:
Per p. 74 of the 2021 Annual Report, the STI was based 50% on a sliding EBIT scale between BWP 250,000,000 – BWP 300,000,000 and 50% on “functional targets” based on the Group’s stated strategy.
Per p. 84 of the 2022 Annual Report, 67% of the STI was based on Group EBIT and Group Return On Net Assets (RONA) split evenly, and 33% based on “functional targets”.
Per p. 84 of the 2022 Annual Report again, vesting of the financial awards for FY 2023 would happen if Group EBIT or Group RONA thresholds were achieved and not both like what was required for FY 2022.
Per the second screencap above which highlights the performance conditions for the 2024 STI, you can see that the metric to measure performance has been changed again to an EBITDA target which had not been disclosed as of the publishing date of this writeup.
The Summary Compensation table, taken from p. 96 of the 2023 Annual Report, is shown in the screencap below. You’ll notice that Mr. Ottapathu and other executives did not receive their STI bonus for FY 2023 because they did not meet or exceed the required financial targets.
Besides his compensation, Mr. Ottapathu has significant skin in the game via his holdings of Choppies common stock. Per the FY 2023 Annual Report, he owned ~29% of the business (528,428,123 shares).
What Does Choppies Do?
Choppies sells groceries to its customers in Botswana, Namibia, Zambia, and Zimbabwe. Per the 2023 Annual Report, Choppies had 177 total stores.
Botswana – 99 locations (57 Super stores, 5 Hyper stores, 15 Value stores, 4 On The Go stores, and 18 Hybrid stores)
Namibia – 14 locations (13 Super stores and 1 Value store)
Zambia – 31 locations (30 Super stores and 1 Hyper store)
Zimbabwe – 33 locations (29 Super stores and 4 Value stores)
To support its stores, the business has 10 distribution centers: 5 in Botswana, 2 each in Zambia and Zimbabwe, and 1 in Namibia.
The business operates three main formats: Hyper, Super, and Value. The screencap below, taken from p. 19 of the 2023 Annual Report, provides a breakdown of each format.
Besides the three main store formats, Choppies also recently launched a Hybrid store format and an “On The Go” convenience store format. There are 18 total Hybrid stores and 4 On The Go stores as of the end of FY 2023. I was unable to find what differentiates a Hybrid store from its other store formats. The On The Go concept are convenience stores located at gas stations in Botswana. Per the 2023 Annual Report, management aims to open up to 100 On The Go locations in various countries over the next three years.
Product Offering
Choppies offers a fairly standard assortment of products to its customers in the form of groceries, fruits and vegetables, baked goods, a butchery, takeaway, and value added/financial services.
Groceries – Choppies offers international branded groceries along with its own private label products. Per p. 14 of the FY 2023 Annual Report, “In addition to the best international branded groceries, we have 422 SKUs of Choppies branded products ranging from fresh, frozen, canned, dry foods, snacks, ethnic specialities, health and beauty care, household as well as laundry products and toiletry products.” Per p. 20 of the FY 2023 Annual Report, private label product sales were 22% of the Botswana segment and 16% of the overall Group’s sales. The only other datapoint I was able to compare this to was back in the FY 2014 Annual Report which stated that private label sales comprised 16% of sales of the Botswana segment.
Fruits and Vegetables – Choppies sells its fruits and vegetables and sources them directly from market and farmers in all four of the countries in which it operates. The FY 2023 Annual Report states that the business works with over 4,300 farmers in total and sells more than 75% of all the produce in Botswana. Per p. 61 of the FY 2023 Annual Report, the business launched an app called Motopi to help farmers in Botswana find buyers, negotiate with them, and place orders for goods.
Bakery – In-store bakeries offer customers bread, cakes, pastries, and other region-specific baked goods daily.
Butchery – Fresh meat and poultry are delivered daily. The business has local supply arrangements in all its regions to keep up with the constant demand.
Takeaway – Prepared food and takeout for its customers. The business has its own “Choppies Fried Chicken” which seems to be so popular in Botswana that management is thinking about offering it at stand-alone restaurants.
Value added and financial services – Offers mobile money, airtime payments, utility payments, event tickets, foreign exchange, and satellite TV subscriptions. Most of this line of business seems to be housed under Choppies’ MonyGlob brand which was acquired in October of 2020. Per public filings, MonyGlob’s main business is money transfer and foreign exchange.
What Is Unique About Choppies?
Assessing what is unique about Choppies, apart from what was written in the previous section, can be done by trying to assess each answer posed in the screencap below about why one would invest in Choppies. I’ll address each point as best as I can given what I’ve learned from reading about the business.
Market leading and strong brand
Per the 2023 Annual Report, with its 177 total stores as of FY 2023, Choppies is the largest retailer in Southern Africa outside of South Africa.
Largest private employer in Botswana
Botswana is in fact the largest employer in the country outside of the government. It had just over 11,000 total employees as of the HY 2024 Report.
Significant market share in the markets in which it operates
I tried to find current information on Choppies’ current market share in Botswana but was unable to. The last update was from the FY 2015 Annual Report which stated that its market share in the country was 36%.
I was unable to find information about its market share in Namibia, Zambia, or Zimbabwe.
Strong private label brand
Choppies has increased its private label product offering from under 60 SKUs in FY 2015 to 422 SKUs in FY 2023.
Economic value creation
This will be addressed in the Valuation section.
Customer and shared value approach
Choppies addressed this on pp. 31 – 32 of its FY 2023 Annual Report which are shown in the two screencaps below.
Political and economic stability in its largest market
Botswana, meaning “land of the Tswana”, is quite a remarkable country. Its journey over the last 60 or so years could be made into a movie. It’s somewhat like what Lee Kwan Yew said about Singapore when he claimed that his country “…is not supposed to exist and cannot exist.”
What is now known as Botswana started as a British colony called the Bechuanaland Protectorate in 1885 and did not gain its independence until 1966. Per the Harvard International Review article on the country, linked here, at the time of its independence, Botswana had 12 kilometers of paved roads and 22 citizens who had attended college. Since its independence, Botswana has increased its GDP significantly. World Bank data show that Botswana’s GDP per capita has risen from ~$59 USD in 1960 to ~ $7,700 USD in 2022.
So, what the hell has happened in Botswana? Generally speaking, a lot of good.
Let’s look at the political stability. Like what happened in Singapore, Botswana had the great fortune of being led by a truly remarkable person. His name was Seretse Khama. He founded the Democratic Party of Botswana and was the country’s first president. He inherited those 12 kilometers of paved roads and 22 citizens who had attended college that I mentioned in the previous paragraph. An added hurdle that he had to overcome was that Botswana was considered one of the poorest countries on Earth at the time he was elected. It’s also landlocked.
Per the Harvard article referenced above, a key feature of his rise to power was that although he descended from a royal lineage, he was freely elected to lead Botswana and didn’t seize power through a bloody conflict or corruption as is so often the case in Africa. Mr. Khama believed in promotion based on merit and cracked down hard on corruption throughout the length of his presidency.
Perhaps the greatest thing he did for his country involved its massive diamond deposits. The government cut a deal with De Beers to mine its vast diamond reserves. The Tswana tribes, including the one that Mr. Khama belonged to, agreed to split the profits evenly throughout the country. Mr. Khama did this in spite of the fact that his tribe had a disproportionate number of diamonds on their land. Besides being a visionary play from a political perspective, this undoubtedly helped Botswana in avoiding the resource course that plagues so many other nations.
Short biography on Seretse Khama:
Geography Now video on Botswana:
Other key features of Botswana’s political stability:
It is the longest uninterrupted democracy in Africa.
Its judicial system is based on Roman-Dutch and customary laws.
The judicial branch is independent from other parts of the government.
Rule of law matters and is enforced.
Per Transparency International, it is the least corrupt country in mainland Africa. Its ranking is just behind Israel, Portugal, and Spain and ahead of Czechia, Italy, Slovenia, and Poland.
On to Botswana’s economic stability. What did Botswana do with all the money it made from diamond mining? Per Wikipedia, Mr. Khama plowed it back into the nation and developed its infrastructure, health care system, and education system. It was the fastest growing economy on Earth from 1960 – 1980. According to the IMF, Botswana’s economic growth from 1966 – 1999 was 9% a year.
The country was and still is heavily tied to diamond mining. It is the world’s second largest diamond exporter. It provides anywhere from 40% - 50% of government revenues in a given year and about ¼ of its GDP.
Tourism is an important industry as well coming in at ~10% of the country’s GDP.
Botswana has solid ratings from S&P Global. Per the linked article, “On March 15, 2024, S&P Global Ratings affirmed its 'BBB+' long-term and 'A-2' short-term foreign and local currency sovereign credit ratings on Botswana. The outlook is stable.
We equalize our ratings on the Bank of Botswana with our ratings on the sovereign, so we also affirmed our 'BBB+' long-term and 'A-2' short-term issuer credit ratings on the Bank of Botswana. The outlook is stable.”
S&P’s rationale for their rating, taken from the same article (bold for emphasis), “Our ratings on Botswana are supported by the country's comparatively strong institutional framework, which has underpinned the prudent management of the country's natural resource wealth; its strong external balance sheet; and low government debt burden. The ratings are constrained by the country's narrow economic base--it still relies heavily on the diamond sector and is therefore vulnerable to external shocks.”
Return on capital exceeds WACC
This will be addressed in the Valuation section even though I’m highly skeptical of WACC.
Optimised distribution infrastructure and strong operational expertise
I’ve already mentioned the 10 distribution centers Choppies has built to serve its stores.
The business boasts a fleet of 421 vehicles that facilitate distribution to its stores.
Choppies has an internal maintenance team for its stores.
Per p. 60 of the 2023 Annual Report, “The Group has a vast distribution network especially in Botswana and has a stated aim that 90% of the population should be within a 10km radius of a Choppies store especially in underserved rural areas, providing access to great value groceries to most citizens. The Group is therefore well positioned to engage in shared value projects with local communities to create economic value in a way that also creates value for society.”
Broad consumer market servicing all income groups
This is proven by its three store formats (Hyper, Super, and Value) which offer differing products and price points.
Diversified earnings in terms of product categories and currency earnings
While Choppies does offer a mix of products, they’re all grocery related except for its “financial services” segment. Unfortunately, it does not break out this segment which leads me to believe that it isn’t providing a meaningful source of revenue or profits. I’m also skeptical of how good its “diversified currency earnings” are. That issue will be addressed in the Valuation section.
Digital journey started for paperless retail
Per p. 13 of the 2023 Annual Report, “Choppies is undertaking a tech transformation venture called QuantumRetail that aims to modernise our technology infrastructure and drive business growth by leveraging technology as the fifth factor of production (along with capital, entrepreneurship, labour and property). This looks at the evolving customer expectations – and how to identify them; the changing operating environment and using technology to benefit from this; emerging new technology and leveraging blockchain, AI and cloud technology to improve efficiencies and performance; moving from an archaic traditional response that is too slow; and linking business performance to investment appetite (while considering the total cost of ownership).
We aim to use technology to transform into paperless retail, own and leverage data, accelerate omnichannel commerce, digitise financial services, and leverage ABCDI new technologies (i.e. AI, blockchain, cloud, data and internet of things), underpinned by a transformation of our personnel. Combining all of this will lead to a transformed experience not only for our customers but also for suppliers and partners.
The rollout of Slimstock, an inventory optimisation application, was our initial foray into this. Since then, we have developed the farmers’ app, suppliers’ portal and data analytics to further understand our customers. There are multiple initiatives currently underway that will further push the envelope on this theme.”
Mr. Ottapthu also commented on this matter in an interview with Business Focus where he stated, “We are already actively collaborating with a US company to introduce a blockchain technology app for farmers. By leveraging US technology, company processes and intellectual property, we can propel our country to the next level of growth. Certainly in the next three to five years, our goal is to become a paperless and contactless retailer. To achieve this, we recognize the importance of leveraging US technology and systems.
We want to adopt a digital approach that will streamline our operations and facilitate access to the international finance market.”
Relentless focus on product and service improvement
This isn’t easy to measure. The only quantitative measures I could look at to try and confirm this were the opening of new stores, differing store formats, and the number of SKUs, both branded and private label, offered by Choppies to its customers. What business doesn’t say or try to achieve these goals in one form or another though? They’re table stakes and a business who isn’t focusing on them will start ceding market share or go out of business sooner or later.
Valuation
Revenue
Shown below is a screencap of Choppies revenue growth from FY 2008 – FY 2023. That data were taken from TIKR.
Choppies has CAGR’d revenue at 10.05% since 2008, but only 5.71% since 2012 when it went public.
Shown below is a segmented breakdown of Choppies revenue and operating income since FY 2020. The data were taken from TIKR. The discrepancies between the reported revenues above and those in the screencap arise from various other forms of income included in Choppies annual reports which are in addition to its retail sales. The other forms of income include commissions from financial services, rental income, transportation income, “miscellaneous income”, and the effects of hyperinflation accounting. Segmented data from the “Rest of Africa” countries was only provided in 2022 and 2023.
Choppies Botswana segment contributes overwhelmingly to both total revenues and total operating income. The “Rest of Africa” segment has contributed meaningfully to revenue, but has lagged significantly with its contribution towards operating income. This conflicts somewhat with its claim in the previous section about “diversified currency earnings”. While it is technically true that business does have diversified currency earnings due to its operations in three countries outside of Botswana, those same earnings don’t seem to be very significant towards Choppies overall profitability.
You may be wondering why I started with segmented results from FY 2020 and not earlier. Choppies had a turbulent period both operationally and financially from FY 2016 – FY 2020 and did not return to profitability until FY 2021. Some of the financial issues that it had to deal with are listed in the bullet points of the Returns on Invested Capital portion of this Valuation section and the rest of the issues I came across can be found in the FY 2017 – FY 2020 had a litany of issues portion of the Risks section of this writeup.
Capital Structure
The asset side of Choppies balance sheet since FY 2012 is shown below.
The biggest concern is with Choppies constant Goodwill impairments since FY 2017. There are other notable drops in receivables and inventory between FY 2018 and FY 2020. As stated in the Revenue subsection above, the financial issues that it had to deal with are listed in the bullet points of the Returns on Invested Capital portion of this Valuation section and the rest of the issues I came across can be found in the FY 2017 – FY 2020 had a litany of issues portion of the Risks section of this writeup
The liabilities and equity sections of Choppies balance sheet since FY 2012 are shown below.
Concerns on this side of the balance sheet revolve around Retained Earnings which was affected by the financial issues mentioned above.
Real Free Cash Flow (RFCF)
Choppies free cash flow is shown in the screencap below.
Choppies has been able to compound its free cash flow, also its “real free cash flow” since there hasn’t been stock-based compensation, by ~11.5% a year since FY 2012. Given its current market cap of ~BWP 900,000,000, the business trades at ~3x RFCF which is quite cheap. Free cash flow has stayed relatively steady over the last three fiscal years.
Returns on Invested Capital (ROIC)
Choppies returns on invested capital since FY 2012 are shown in the screencap below.
Choppies is a tale of two ROICs. If you want to use NOPAT as your proxy for profitability in the numerator of the ROIC equation, then things looked great until FY 2016 when ROIC decreased significantly and then proceeded to go negative in FY 2018, and then snapped back significantly since FY 2019. Substituting Net Income for NOPAT produces negative ROIC for FY 2017 – FY 2020 and ROIC of <15% each year since.
What were the factors that affected ROIC and the spread between NOPAT and Net Income in those years? Let’s take a look.
FY 2016: Total operating expenses increased 28.5% due mostly to an increase in SG&A from BWP 866.32 million in FY 2016 to BWP 1135 million in FY 2016.
FY 2017: SG&A increased to BWP 1448 million from BWP 1135 million in FY 2016. Impairment of Goodwill of BWP 127.71 million and an Asset Writedown of BWP 39.55 million. Interest expense more than doubled from the year before to BWP 54.55 million from BWP 26.66 million in FY 2016.
FY 2018: SG&A increased to BWP 1806 million from BWP 1448 million in FY 2017. Provision for bad debts was BWP 131.83 million. Restructuring charges of BWP 77.14 million and Impairment of Goodwill of BWP 125.7 million. Interest expense ticked up to BWP 78.7 million.
FY 2019: SG&A almost halved to BWP 996.86 million from BWP 1806 million in FY 2018. Interest expense lowered to BWP 63.06 million. Another BWP 14.14 million in Restructuring charges, but no more Impairment of Goodwill. Asset writedown of BWP 17.64 million. Huge hit from Earnings of Discontinued Operations of BWP 405.74 million.
FY 2020: SG&A stayed relatively the same. Interest expense popped to BWP 103.09 million. Impairment of Goodwill of BWP 9.87 million. Absolutely crushed again by Earnings from Discontinued Operations of BWP 435.41 million.
Returns on Incremental Invested Capital (ROIIC)
Choppies returns on incremental invested capital (ROIIC) since 2008 are shown below.
You’ll notice that the Net Income Value Compounding Rate of the business is extremely high at 80%. I double checked to make sure that I did the calculations right and then realized that the Net Income Reinvestment Rate is super high and skewed by the fact that Choppies had a significant amount of losses between FY 2017 and FY 2020. This crunched the Cumulative Net Income of the business and essentially “rewarded” it in my calculations with an eye-popping reinvestment rate.
To try and correct this, I looked at the same figures, but started with FY 2012 which is the year that Choppies went public. My results are shown in the screencap below.
Using FY 2012 as the base measurement year significantly changes the Value Compounding Rate of the business. It slightly lowers the NOPAT rate to 8% from 11% in the first ROIIC calculation. However, the Net Income Value Compounding Rate goes negative. Choppies is punished in this case, and rightly so, for its losses between FY 2017 and FY 2020. There is another, different quirk with the Net Income Value Compounding Rate in this case. When you multiply the Net Income Reinvestment Rate by the Net Income ROIIC, it produces a positive ROIIC of 3.4%. That doesn’t make any sense in the real world.
Choppies stock performance since it IPOd in 2012 is shown below. The image was taken from TIKR.
Choppies stock price has CAGR’d at -9.9% a year since going public which I think is fair considering the problems the business had with profitability between FY 2017 and FY 2020.
You could make a case that the business is undervalued based on its NOPAT ROIC and ROIIC results, but I don’t think that fair considering all the additional expenses related to impairments and writedowns and the losses it suffered from discontinued operations. Choppies has bounced back a bit since FY 2021, which it deserves credit for, but I’m still sticking to the picture painted by the Net Income ROIC and ROIIC since FY 2012 which is that Choppies has destroyed and not created value since it went public.
Remember the two points about “economic value creation” and “return on capital exceeds WACC” mentioned in the previous section about what makes Choppies unique? Let’s address those with the benefit of having read the Valuation section. It’s fair to say that, in the best-case scenario, its economic value creation has been low. While I’m very skeptical of WACC in the real world, Choppies returns on capital have been solid in some years, but they haven’t been consistent. It’s also been negative or quite low since FY 2017 on a Net Income Basis.
Risks
FY 2017 – FY 2020 had a litany of issues
The issues described below are in addition to the financial losses mentioned in the previous section. This list may not be comprehensive and I could have missed something in my readings and analysis. Unless otherwise noted, all the information below came from Choppies Annual Reports from FY 2017 – FY 2019.
FY 2017
Only real additional concern is that the annual report cannot be accessed via the Choppies IR website, so I’m in the dark about what went on at the business during this time.
FY 2018
PricewaterhouseCoopers (PwC) questioned Choppies accounting practices. To date, this is the only business I’ve analyzed where this happened.
Management admits to having three CFOs in the last three years.
Management admits that internal audit didn’t exist at Choppies, nor did it have a compliance model.
Per the auditor’s report, the Board hired two legal firms and a forensic auditor to investigate various financial issues at the business including bulk sales transactions and business acquisitions in South Africa, accounting for bulk sales transactions in Zimbabwe, the nature of the relationship between Choppies and Payless Supermarkets (described more in the next bullet point), completeness of related part disclosures , multiple misstatements of subsidiaries, and an inability to obtain sufficient appropriate audit evidence.
Choppies claimed that it was not an investor in Payless Supermarkets and only acted as a financier even though it included Payless in its buying group to earn cheaper prices and rebates from suppliers. Choppies reasoning for not being an investor in Payless was that it was a creditor and did not have an equity stake in the business, its return was fixed and not variable, and it was simply providing a service to Payless and protecting its investment even though it controlled the finance and accounting functions of the business.
Choppies had 95 subsidiaries. 89 were considered material. Trying to make sense of them based on the information provided in the FY 2018 Annual Report was impossible.
Choppies was not performing assessments on its depreciation of PPE which resulted in a BWP 96,356,232 decrease in accumulated depreciation for FY 2016 and BWP 10,419,492 increase in accumulated depreciation in FY 2017.
Goodwill was impaired by improperly accounting for its Cash Generating Units at a group level and not at a store level. This also resulted in an impairment of PPE of BWP 33.7 million in FY 2016 and BWP 39.6 million in FY 2017.
Inventory was improperly accounted for which resulted in decreases in the value of inventory of BWP 16,772,512 in FY 2016 and BWP 29,434,306 in FY 2017.
Improper recognition of deferred tax benefits in its South African segment.
Revenue and cost of sales were understated due to an “oversight” of certain transactions in its South African segment.
Did not disclose contingent liability of guaranteeing debts to third party suppliers for a subsidiary named Fours Cash and Carry.
FY 2019
PwC resigned as Choppies auditor. Choppies ended up suing PwC. Articles about the lawsuits can be found here and here.
Mazars, its new auditor, offers a “split opinion” on Choppies financial reports.
Business admits that it still did not have a functioning internal audit team or compliance model.
Continued to claim that it did not control Payless Supermarkets for the same reasons mentioned previously.
An allegation of fraud in its South African and Zimbabwe segments. Choppies counsel claimed that no party would’ve materially benefitted in either case. A full explanation of each fraud claim can be found on Note 43.8 of the FY 2019 Annual Report.
An Extraordinary General Meeting (EGM) was held where the entire Board, besides the two largest shareholders, were replaced. One of those shareholders was Ram Ottapathu and the other was Farouk Ismail who is a co-founder of the business and its second largest shareholder. One of the Board members who was replaced was Festus Mogae, the former president of the country. The results of the EGM can be found here.
Capital allocation
Choppies capital allocation has not been very good outside of Botswana. Besides its current operations, Choppies previously operated in South Africa, Tanzania, Kenya, and Mozambique. These were the discontinued operations mentioned above that crushed earnings during the tumultuous FY 2017 – FY 2020 period. The operations in all four of these countries were closed and/or sold by FY 2020.
Choppies current foreign operations aren’t really knocking the cover off the ball either. If you recall their segmented financial information above, the “Rest of Africa” segment does not contribute a ton to Choppies operating income.
This biggest sore spot currently is Zimbabwe. Its issues are highlighted on p. 50 of the 2023 Annual Report which are shown in the screencap below.
The annual report frequently shows financial results which exclude Zimbabwe to frame its overall business in a positive light. This makes me wonder why Choppies continues to operate there in the first place. How great can Zimbabwe’s market be if its constantly facing hyperinflation, high unemployment, and a shortage of foreign currency?
An update about Zimbabwe was provided in the HY 2024 Report which wasn’t very encouraging. Per p. 13 of the report, “We have implemented several measures to reduce losses and enhance cash flows. During the reporting period, two stores were closed and one store was relocated. We also indefinitely deferred a portion of the remuneration of the senior management team. We are also planning to close or relocate at least four stores to limit losses post the reporting period.”
Choppies decided to broaden its horizons and purchase Kamoso in July of 2023. Per p. 9 of the 2023 Annual Report, “The acquisition is an opportunity for growth and expansion and diversifies the Group into liquor and building materials. Kamoso Africa is a leading manufacturing, supply and distribution company and was previously part of the Choppies Group prior to its listing.” Kamoso also owns a milling production and distribution business, a food import operation, a diagnostic medical equipment distributor, a tissue packing manufacturer, and a water bottling operation. Even though there is a description of Kamoso’s strategic fit on p. 52 of the 2023 Annual Report, I have absolutely no idea how this acquisition will move the needle for Choppies, but only time will tell.
Why so many related parties/entities?
This was another eyebrow raiser when I was analyzing the business. Up until the FY 2023 Annual Report, there were dozens of related entities that owed Choppies money, Choppies owed money to, sold product to, or purchased goods or services from. A current list of them is only available by request and was not published in the FY 2023 Annual Report.
There was an interesting description of them on p. 171 of the FY 2022 Annual Report, “Related entities are third parties in which one or both of the founding shareholders or their immediate family members have significant control through ownership or directorship.” Mazars, the new auditor, investigated the related parties/entities and has not found anything nefarious to date, but that many related parties/entities don’t pass my personal sniff test. It just stinks.
Botswana specific risks
Botswana is still very reliant on its diamond reserves. Per the World Bank, diamonds contribute 90%+ of Botswana’s exports. The government is aware of this and has started to diversify its economy away from diamond mining.
Per the same World Bank data, unemployment was just under 26% as of Q3 2023.
Per Unicef data, the adult HIV prevalence rate in Botswana is 20.3%. It is the fourth most affected country by HIV and AIDS behind only South Africa, Eswatini, and Lesotho. The country has made strides in assessing and combating its HIV problem, but it remains a daunting challenge.
Growth inside the country is another concern. With a population of <3,000,000, how many Choppies stores can there be before Botswana becomes saturated?
Ram’s iron grip
With all the company specific issues mentioned above, notably its stock performance since it IPOd, the operational and financial difficulties from FY 2017 – FY 2020, its capital allocation, the related parties/entities, etc., Mr. Ottapathu has managed to stay in control. You can see why I stated that he has an iron grip on the business.
I understand that he owns ~29% of the company, but it seems like something else is going on with Ram at Choppies. You’d think that he would’ve been sacked or at least on the hot seat after all those issues, but he remains at the helm. Anyone considering investing in Choppies must be aware that he is firmly in control.
Tailwinds
Being the largest private employer in Botswana, Choppies is a key player in the country’s economic diversification plans.
Even if the market is somewhat saturated, the demand for grocery stores in Botswana won’t be going away anytime soon.
Conclusion
Is Choppies a good business? I think its Botswana segment is a pretty good one, but I’m skeptical of its “Rest of Africa” segment. That, along with the issues mentioned in the Risks section give me too many causes for concern. Its valuation of ~3x on an FCF basis and ~6x based on FY 2023 Net Income are cheap multiples, but the growth doesn’t seem to be there as evidenced by its subpar and even negative ROIIC. I’m going to pass on Choppies for the time being.
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Disclosure: I do not own shares in Choppies.