Thursday, October 29, 2020

Auditor concerned, but Choppies is not

Botswana’s biggest retailer, Choppies Enterprises, is working around the clock to restructure the company, getting rid of loss making stores, and re-negotiating payment terms with lenders all in efforts to prove to the auditors that it is still a viable business after concerns that the company’s liabilities far exceed assets. 

Mazars Botswana, appointed as external auditors in February 2020, reported that Choppies faces uncertainties that casts doubt on its ability to continue as a going concern. In the accounting jargon, a material uncertainty exists when the company is unable to obtain a “high level of confidence” about the entity’s solvency and liquidity for the “foreseeable future”. 

“We draw attention to the fact that the group incurred a net loss of P371 million during the year ended June 2020, had accumulated losses of P1 billion, and as that date, the group’s total liabilities exceeded its total assets by P467 million, and the total current liabilities exceed total current assets by P777 million,” wrote Mazars in an independent auditor’s review report on interim financial statements.

“These events or conditions indicate that a material uncertainty exists that may cast significant doubt on the company’s ability to continue as a going concern. Our opinion is not further modified in respect of this matter,” read part of the report.

For the first time in history, Choppies last year recorded a negative equity of P80.1 million, and this has since increased to P467 million in the period under review. The decline in equity was blamed on the deteriorating Zimbabwean currency, where the company operates chain of stores, and also down to discontinued operations in South Africa, Kenya, Tanzania and Mozambique – which were the main contributor to the negative equity following their combined P469.6 million loss. 

However, the Choppies board and management say the retailer remains a going concern, an assumption that the loss-making grocer will meet its financial obligations when they fall due. Though the negative equity gave rise to extensive investigations into the ability of the company being able to operate as going concern for the next year and medium term thereafter, the board says it considered the 2021 budgets, detailed cashflow forecasts – stress tested, banking facilities and covenants, undertakings of financial support by the founder shareholders, the economic outlook of the countries in which it operates as well as the possible future impact of the COVID 19 pandemic. 

“The board, based on the evidence provided by management, concluded that the group has already taken the necessary steps to remedy the past situation by discontinuing loss making operations in South Africa, Mozambique, Kenya and Tanzania, and that the company and the group should be a going concern for the foreseeable future.,” said Choppies chairman Uttam Corea and chief executive officer Ramachandran Ottapathu in a statement to shareholders. 

Still, the retailer faces choppy waters ahead due to disruptions caused by the outbreak of the coronavirus, which the company says will result in unpredictability of the business environment. Assessments made of the impact of Covid-19 containment measures on the Group’s businesses during the three months, April, May, and June 2020, indicated a loss of revenue of approximately P190 million. 

With the mounting losses and large borrowings that have to be serviced, the Choppies board decided not to declare a dividend for the financial year ended June 2020. The company’s cash during the period was recorded as P60 million, down from P206 million. 

“The company is in the process of restructuring its debt. The Debt Restructuring Plan will allow the company to repay the lenders in smaller tranches than the previous structure which will release some cash to the company and improve the cashflows going forward. The board is of the view that the buffer that has been provided by lenders coupled with improved profitability levels will go a long way in keeping the company as a going concern for the short, medium to long term,” Corea and Ottapathu said. 

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