SUMMARY OF RESULTS - South Africa operations a drag

Choppies interim results for the six months ended 31 December 2014 were a mixed bag with the top line recording impressive growth. Revenue soared by 20% y/y mainly due to new store expansion, while

GP margins were maintained at 21.4% (as compared to 21.3% during the period HY 2013). The market remain the key driver to the group’s revenues, contributing 66% while SA 21% and Zimbabwe 13%.

PAT was almost flat growing marginally by 2% while net profit margin Revenue up 20%, while PAT marginally was at 3.4% (lower than the 4.1% posted during the comparable up by 2% period). In SA, Choppies opened 31 stores, however, the retailer continue to incur losses in that market of P8.04mn; an increase from a P6mn loss during the period ended 31December 2013. Surprisingly, the group recorded some good numbers once again from the Zimbabwean market, achieving a 250% growth in revenues. Overall, EPS edged up by 4% to 8.57thebe but the P/E remains the highest in the market at 27x.

Choppies now trades at a very high PE of 27x against the market average of 13x. The P/B value is also high at 4.2x. Since listing at 115 thebe, Choppies share price has risen by more than 247% mainly buoyed by its expansion in Botswana, South Africa and Zimbabwe.

Plans are also at advanced levels to expand into Namibia, High PE and P/B value Mozambique, Zambia, Kenya and Tanzania. While we applaud the expansion strategy, we are of the view that this might have some potential negative impact on margins going forward. Although the Zimbabwean market has started off on a head start, that growth cannot be guaranteed as the economy is still very fragile and is characterised by tight liquidity conditions, political uncertainty and deflation. South Africa operations are still to make a profit. We are of the view that the group’s margins will come under pressure as a result of the aggressive expansion strategy resulting in earnings growing at a slower space. “REDUCE”

Against this background, we recommend investors who bought the stock at lower levels, especially during IPO to REDUCE at current levels and possibly re-accumulate when the price dips to levels around

350thebe or below.

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Choppies Holdings Interim Results Analysis **Dec 2014** Prepared by Motswedi Securities (Pty) Ltd (Posted on 30 Mar 2015)

OVERVIEW OF THE BUSINESS MODEL

Choppies operates two different profile stores which are Superstores &

Hyper stores. Do date it has 72 stores in Botswana (3 DC’s), 31 in South Africa (2 DC’s) and 18 stores in Zimbabwe (2 DC’s).

Source: Choppies Financials

In Botswana, it is the largest supermarket chain with a market share of around 34% and is well poised to capture the ongoing shift from informal to formal trade which is being made possible by the advent of more shopping malls especially in . The market is slowly Market share of 34% in Botswana shifting into more formalized retail channels as more shoppers migrate from independent retailers and general dealers. Formalized retail channels offers better, quality products at competitive prices, wider product ranges and better shopping convince.

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Choppies Holdings Interim Results Analysis **Dec 2014** Prepared by Motswedi Securities (Pty) Ltd (Posted on 30 Mar 2015)

SOUTH AFRICA OPERATIONS – Profitability elusive South Africa’s retail market is very developed with formal retail penetration at 150sq meters/capita. Choppies set foot in South Africa in June 2008 with a store in Zeerust and since then has had an exponential growth in the number of stores. The expansion into South PBT loss of P8mn in Africa is concentrated in the North West and Limpopo Provinces which SA are along the existing Botswana supply routes and have similar demographics patterns with Botswana. Despite the increase in the top line, the bottom line has been disappointing as it has been performing below our expectations and made a PBT loss of P8mn during the six months period. GP and EBITDA margins came in at 21.2% and 2.2% respectively.

Source: Choppies Financials

Labor unrest in South Africa’s platinum mines impacted negatively on Choppies results given that the majority of Choppies stores are within the platinum mining area. Our worry is that these labor arrest are now a permanent feature in South Africa and will continue to be a drag on Choppies performance in that market.

ZIMBABWE OPERATIONS – Defying odds

Choppies commenced operations in , Zimbabwe’s second largest city with 11 stores on 26 October 2013 and these have since been expanded to 15. Choppies initially entered the Zimbabwean market through the acquisition of a 49% shareholding in a Zimbabwean supermarket chain consisting of 10 supermarkets and 1DC around Bulawayo. The remaining 51% is owned by Zimbabwean nationals who meet indigenisation 3

Choppies Holdings Interim Results Analysis **Dec 2014** Prepared by Motswedi Securities (Pty) Ltd (Posted on 30 Mar 2015)

requirements. Three more shops and a DC has been opened in Harare with a target of 30+ stores in Harare alone over the long term.

Choppies Zimbabwe footprint

Source: Choppies Financials

Zimbabwe’s retail market is still very much under developed with the formal retail penetration at only 7sq meters per capita with only 25% formal retail channel. Zimbabwe operations have been exciting and

Choppies seems to be reaping the fruits of taking such a bold step to invest in that country. For the financial year under review, Zimbabwe operations contributed 13% and 7% towards revenue and EBITDA despite the economic challenges in that economy.

Gross Profit margins improved to 18% from 20%, while EBITA came in at 3%. What is striking is that these positive numbers were registered GP Margins up to 18% at a time when the economy is in deflation mode (inflation was at -1.4% y/y in February), company closures, job losses, lower disposable incomes and tight liquidity conditions.

BOTSWANA OPERATIONS – Reaching saturation

Choppies with 72 stores in Botswana is the biggest player in the country and commands market share around 34% according to a

Research conducted by Briggs and Associates. Formal retail penetration is projected to be at 94 sq meters per capita with the formal retail channel at 55%. Choppies plans to open 5 more new stores before the end of this year as it seeks to consolidate its market share. 4

Choppies Holdings Interim Results Analysis **Dec 2014** Prepared by Motswedi Securities (Pty) Ltd (Posted on 30 Mar 2015)

Competition in the retail space remains very intense with the main players coming from South African chain stores such as (10 stores), Spar (26 stores), PnP (5 stores) and other players such as Woolworths, Game’s Foodco and Foodlovers (which recently sold some of its stores to Spar). The local players includes Shoppers, Payless and other independent retailers although their combined market share is not significant. The retail sector landscape is expected to remain even more competitive as more retail chain stores enter the market and as retailers become more aggressive with their pricing, further putting pressure on margins. Already we are noticing some of these signs as seen by the levels of concentration especially in urban areas and it is only a matter of time until the industry is saturated and overtraded.

WHERE IS THE GROWTH STORY? Regional Expansion drive – Choppies expansion drive outside Botswana is already bearing dividends especially in Zimbabwe. The Zimbabwean market is significantly less penetrated by formal retail outlets. The old existing retail chain such as OK Zimbabwe are Expansion outside Botswana to drive struggling to maintain their market share due to undercapitalization and growth

Choppies entrance into this market is seen as a welcome development by consumers who have been deprived of variety of products at competitive rates. In Zambia there is huge potential for the formal retail market as only 14% of the retail market is formal, while the formal retail market is projected to grow at a CAGR of 13.9% by 2019.

Expansion into Namibia’s market is expected to be easy given its proximity to Botswana and SA operations. The market is also similar to the ‘core’ Botswana market. In East Africa, Choppies will not do it alone but has entered into a joint venture agreement with an unnamed local partner and the first store in Tanzania is expected before the end of FY2015, while Kenya is currently under assessment.

Strong Management & Operational team – Management at Choppies have intense experience in the retail sector which is a vital cog in the groups expansion strategy. Management significant shareholding in Choppies is also positive and helps to align their interest with the

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Choppies Holdings Interim Results Analysis **Dec 2014** Prepared by Motswedi Securities (Pty) Ltd (Posted on 30 Mar 2015)

company, a situation that will foster a ‘win – win’ solution between management and shareholders.

Efficient Distribution and Logistics channels – Choppies have a simplified but effective business model which has aided to the groups success. The Distribution Centres are strategically located with an efficient transport system. It is rare to find empty shelves in Choppies stores. The strategy to concentrate on the lower LSM group and taking the business to where people are has been successful. Convenience shopping is a big part of Choppies business model and it is not surprising to note that more than 80% of its sales are done between 4pm and 8pm when most traditional shops have already closed.

Good margins from ‘in-house’ branded products – Choppies branded High Margins from products currently contributes 18% towards revenue and the target is to Choppies branded products increase this to 25%. Margins are also good from these products and this will go a long way in boosting Choppies bottom line.

THREATS / WEAKENESS

Slow economic growth and depressed disposable incomes might slow consumption and affect the retail sector. The IMF has revised downwards South Africa’s and Zimbabwe’s GDP growth projections and might impact on the business volumes of Choppies in these markets.

Competition is also intensifying both in Botswana and South African markets. More players are getting into the retail market, ie Shoppers Supermarkets in Botswana which target the same market. In South

Africa some major retail outlets are also eyeing the low income bracket Intensifying competition by expanding into low income townships through rolling out budget and low-cost supermarkets, thereby increasing competition for Choppies. Cambridge Stores, owned by Massmart’s, Shoprite U Save and Spars Savemor has already taken the initiative.

The rapid expansion especially in Botswana, a small country with a population of around 2mn people and in a market which is almost saturated might result in cannibalism among Choppies stores and this situation might lead to a reduction in margins.

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Choppies Holdings Interim Results Analysis **Dec 2014** Prepared by Motswedi Securities (Pty) Ltd (Posted on 30 Mar 2015)

Although Zimbabwe operations have exceeded our expectations, the market is still fragile with soft disposable incomes. The economy Zim operations still already is in deflation mode reflecting the weak disposable incomes fragile and this might affect the growth of Choppies in that market. The political environment is still fragile and any instability will therefore affect earnings. In addition, competition is also intensifying with other local established retailers such as listed OK Zimbabwe, TM Supermarkets recapitalising their stores and expanding aggressively.

While Choppies brand is very strong and has been well received in

Botswana, it is still growing in South Africa and Zimbabwe and therefore gaining market share might be challenging than it has been in

Botswana.

The labour unrest in especially in South Africa may continue to have a negative impact on Choppies operations in that country. During 2014 the strike in the platinum mining sector dragged down Choppies turnover by as much as 40% in some stores as over 60% of Choppies stores are within the strike affected areas. These labour unrest are likely to remain a permanent feature in the short to medium term given the strong unions in SA and this might continue to affect operations.

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Choppies Holdings Interim Results Analysis **Dec 2014** Prepared by Motswedi Securities (Pty) Ltd (Posted on 30 Mar 2015)

VALUATION & RECOMMENDATION Choppies trades at a very high PE of 27x against the market average of 13x. The P/Book value is also high at 4.2x. Since listing at 115 thebe, Choppies share price has risen by more than 247% mainly buoyed by High PE and P/B values its expansion in Botswana, South Africa and Zimbabwe. Plans are also at advanced levels to expand into Mozambique, Zambia and Tanzania. While we applaud the expansion strategy, we are on the view that this might have some potential negative impact on margins going forward and the continued losses in South Africa do not surprise us. Although the Zimbabwean market has started off on a head start, that growth cannot be guaranteed as the economy is still very fragile and is characterised by tight liquidity conditions, political uncertainty and deflation. We are of the view that margins will come under pressure as a result of the aggressive expansion strategy resulting in earnings growing at a slower space. Against this background, we recommend ‘REDUCE’ Recommendation investors who bought the stock at lower levels or during IPO to cash in on their gains with possible buying opportunities around 350thebe. Recommendation: Reduce

RECOMMENDATION SCALE Buy Hold Reduce Sell

Sustainable Trading at a Weak Balanced Premium Fundamentals Fundamentals Strong Opportunities Growth in the long Stable Growth term Threatened Outlook and Growth Overvalued at Undervalued Par Valued Over Valued current levels

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Choppies Holdings Interim Results Analysis **Dec 2014** Prepared by Motswedi Securities (Pty) Ltd (Posted on 30 Mar 2015)

Trading & Liquidity

Market Cap BWP4.7 billion

Market Cap USD475.6 million Shares in Issue 1,174,207,583

Year End June

12 month high P4.31 12 month low P3.04 Current Price P3.97

Listing Price P1.15

Reuters Code CHOPP.BT

ISIN No. BW 000 000 0033

BSE Code CHOPPIES

RECOMMENDATION: REDUCE

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Choppies Holdings Interim Results Analysis **Dec 2014** Prepared by Motswedi Securities (Pty) Ltd (Posted on 30 Mar 2015)

Choppies ProFoma Income Statement

H1 2014 H1 2013 (Pm) (Pm) Change

Revenue 3 008 2 504 20.1%

Cost of Sales -2 364 -1 971

Gross Profit 644 533 20.9%

Other Income 11 8

Operating Costs -514 -408

Operating Profit 141 133 6.0%

Interest Paid -12 -5

Interest Received 1 3

PBT 130 131 -0.8%

Taxation -26 -29

PAT 104 102 1.9%

Foreign Currency Translation -6 -17

Profit for the Year 96 85 12.9%

Attributable to Owners 99 86

EBITDA 206 184 11.9%

EPS 9 8 +3.9%

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Choppies Holdings Interim Results Analysis **Dec 2014** Prepared by Motswedi Securities (Pty) Ltd (Posted on 30 Mar 2015)

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Disclaimer: The views expressed in this research note reflect the views of Motswedi Securities (Proprietary) Limited based on the information available at its disposal at the time of writing and may change without notice, and is provided for information purposes only. While Motswedi Securities (Proprietary) Limited has taken all reasonable steps in carefully preparing the document, it does not take any responsibility for any action that may be taken on the basis of the information contained herein. Each recipient of it is advised to undertake its own analysis and evaluation of the terms and contents hereof, and obtain independent advice as appropriate, before acting in any way upon the information contained herein. Accordingly, this document is not intended, and no part of this document should be read, as constituting, in any way, an offer or other solicitation for the purpose of the purchase or sale of any of the securities referred to herein. This document may not be reproduced, distributed or published by any recipient for any purposes without the authorization of Motswedi Securities (Proprietary) Limited.

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Choppies Holdings Interim Results Analysis **Dec 2014** Prepared by Motswedi Securities (Pty) Ltd (Posted on 30 Mar 2015)