Choppies: An African growth story

The number of African companies with an inward listing on the JSE could be set to increase.

May’s successful listing on the JSE of Choppies Enterprises, Botswana’s leading supermarket chain, may well pave the way for other African corporates to follow in its footsteps. Despite the JSE’s continued efforts to attract African companies to its exchange, Choppies is only the fourth African company to have an inward listing on the JSE with the others being energy group Oando (Nigeria), financial services group Trustco Group Holdings (Namibia) and tourism business Wilderness Holdings (Botswana). But this number could be set to increase as fast-growing sub-Saharan African economies continue to attract investor interest and the benefits of listing on the JSE and accessing South African and emerging markets capital are recognised. Over the past few years, investing in Africa has shifted from being the preserve of a few daring frontier funds. Traditional emerging market investors have become well-versed in the macro-economic and political conditions in sub-Saharan Africa with an impressive understanding of the African corporate landscape. Many South African asset managers have dedicated funds and teams to focus on African opportunities. As a result, deep pools of equity capital are available via the JSE for high-quality African companies, particularly where management teams already have a successful track record.

Rationale for a JSE listing

Choppies has been listed on the Botswana Stock Exchange since 2012, but suffered from low levels of liquidity and an idling share price. While many investors followed Choppies’ story with interest, a lack of liquidity prevented meaningful investment. The Choppies management team, also the major shareholders in the company, decided to pursue a secondary inward listing on the JSE to raise capital for its African expansion plans, and enhance the liquidity and tradability of their shares through a greater spread and diversity of investors. The JSE is Africa’s largest and most liquid exchange with almost 400 listed companies. For five consecutive years the JSE has ranked first among 144 exchanges for the effectiveness of regulation and supervision. The JSE is supported by a very large and sophisticated local asset management industry but also has a high level of foreign investor participation. It is the market of choice for international investors looking to gain exposure to the leading companies in South Africa and a gateway into the broader African continent. A Choppies listing on the JSE would provide a unique opportunity for investors to access a compelling African growth story.

African expansion

Few companies have set as ambitious growth targets as Choppies, which currently operates 129 retail stores in Botswana (where it is the market leader), South Africa and Zimbabwe. By the end of 2016, Choppies is targeting over 200 stores, continuing to grow strongly in its existing markets as well as entering new markets in neighbouring Nambia and Zambia, and expanding eastwards into Kenya and Tanzania. With strong economic growth prospects, a burgeoning middle class and low formal retail penetration, sub-Saharan Africa presents many attractive and exciting opportunities for the retailer. For example, formal retail penetration in Kenya is below 50% while in Tanzania and Zambia it is below 15%. The execution of Choppies’ African expansion strategy, however, is not without risks and challenges, including political instability, government interventions and regulatory changes, availability of suitable real estate, reliable logistics infrastructure and difficulties in establishing supplier relationships and supply chains. Many investors recognise the difficulties that Shoprite experienced in East Africa and its subsequent withdrawal from Tanzania, and those Woolworths faced in West Africa and its subsequent withdrawal from Nigeria. Choppies growth strategy in Africa is predicated on three important business principles:

  • Firstly, in all countries other than Botswana and South Africa, Choppies operates with strong local partners. Most notably, for its expansion into East Africa, Choppies has established a formal joint venture with the promoters of Export Trading Group, the leading agricultural commodities trading and logistics business, which has been long-established in the region.
  • Secondly, it has always been Choppies’ philosophy to support and establish relationships with local suppliers, wherever possible, rather than import products. The manufacturing bases in Zimbabwe, Zambia and East Africa are relatively strong and a majority of products can be sourced locally. Supporting local suppliers has the added benefit of putting money back into local economy and ensuring consumers can spend more at Choppies stores.
  • Lastly, with a primarily lower- to middle-income target market, Choppies will continue to focus on meeting the needs of the “common man”, with local brands and products that appeal to local consumers. Anecdotally, there are only 12 supermarkets in Dar es Salaam (a city with population of over four million people) all of which are focussed on serving the small expatriate community.

Choppies recently announced the acquisition of 10 stores in Kenya, which provides the company with an immediate footprint of established stores and a platform from which to grow in Kenya. Choppies is also due to open its first stores in Zambia and Tanzania this year.

Benefits of the JSE listing

On May 27, 2015, Choppies successfully listed on the JSE, with a market capitalisation of R6.7 billion. The listing was accompanied by a R1.36 billion offering of shares, which facilitated a R575m primary capital raising to fund the company’s African expansion plans, together with a R784 million sell-down by management to improve free-float and liquidity. The offer generated very strong interest from both South African and offshore investors and was significantly oversubscribed with more than 60 investors in the book. The offer price of R4,90 per share represented a 2% discount to the then prevailing share price on the Botswana Stock Exchange and a premium multiple to Shoprite and Spar. The benefits to Choppies’ shareholders have been self-evident. The share price has risen from the offering price of R4,90 to above R6, with a corresponding increase in the Pula price on the Botswana Stock Exchange. Liquidity across both exchanges (importantly, the shares are fully fungible) has also significantly improved, with average daily volume traded increasing from 0.4 million shares to 2.3 million shares. Importantly, companies that are inward listed on the JSE are classified as ‘domestic equities’ and South African fund managers are not required to utilise their offshore investment allowance and can invest without limitation. A JSE listing unlocks a significant pool of additional capital that would not otherwise be available. There have also been tangible business benefits to Choppies. The listing attracted significant media interest which raised the company’s profile and credibility in South Africa, in particular with suppliers and real estate developers. Choppies’ successful listing could well attract other African corporates to Africa’s largest and most liquid stock exchange.

Friesenecker is a senior transactor in Equity Capital Markets at Rand Merchant Bank.

(This article first appeared in the DealMakers quarterly magazine)


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