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 Botswana 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. 1 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 Gaborone. 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. 2 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 Bulawayo, 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 Shoprite (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 5 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%.