Thursday, September 28, 2023

Trading for pennies, can the Choppies share price recover from the 2018 boardroom brawl?

Can a corporate scandal be a buying opportunity, or does it taint a stock for years? That’s the question surrounding Botswana’s budget retailer Choppies Enterprise as it attempts to work its way out of its 2018 board room brawl that shuttered its share price at both the Botswana Stock Exchange (BSE) and the Johannesburg Stock Exchange (JSE).

It’s also a question that a few other companies listed at the local bourse—Letshego Holdings, BBS Limited, are facing or have faced in the past with vastly different outcomes.

Local capital markets data shows that in some instances, the corporate scandal turned out to be nothing but a speed bump that created an opportunity for investors to buy share of the company in question at a bargain price. In others, it was the harbinger of systemic problems that were just starting to surface. The last scenario seems to be applicable to Choppies Enterprise whose share price has failed to recover beyond its IPO Price since 2018 after the suspension from the BSE and JSE was first announced. The retailer was suspended for failure to publish audited financials and since then its share price at both BSE and JSE have been on a free fall.

The failure to publish audited financial results on time was due to what the company’s external auditors – PwC at the time flagged as ‘processes and transactions’ that could distort the true picture of the company’s financial health.  When the delayed June 2018 financials were finally released in December 2019, the capital market, shareholders and prospective investors got stunned by a P445 million loss (2018), and another shocking loss of P170 million (2017) which was initially reported as a P74.6 million profit when international auditor – KPMG did the retailer’s books. The losses extended to 2019, with retailer booking in a P428 million loss, and followed with a loss of P370.6 million for the year ended June 2020.

Fodder of controversy….

But even before the reported losses, the budget retailer’s operations seems to have been a fodder of controversy, starting off with the company’s strategy to associate heavily with the country’s political leaders, which some expert say it gave the retailer an unfair advantage. The group appointed Botswana’s former president Festus Mogae as its chairman on the eve of its listing at the Botswana Stock Exchange (BSE) in 2012. The appointment gave the company a clout and made it attractive to the country’s institutional investors, including the Botswana Public Officers Pension Fund (BPOPF), which bought a sizable stake in the company. Fast forward to 2018, a boardroom brawl emerged following a costly expansion in the subsequent years that left the company in a precarious financial position. This forced the then Mogae led board to make an attempt to oust company chief executive officer and co-founder Ramachandran Ottapathu. Mogae and his board failed and instead were the ones who were booted out of the board. Shortly thereafter the true extent of the retailer’s financial mess unravelled which saw its share price at the BSE staying at P0.60, below its IPO price. To date the price has not moved beyond P0.60 or the Initial Public Offer Price of P1.15.

In the meantime, the failure to recover by Choppies share price could be a case study for finance students for a theory that suggest that not every company is fortunate enough to experience the relatively quick turnarounds (and hefty gains) after a corporate scandal such as the one the local retailer was facing. The students of finance could also explore the reasons motivating the Choppies’ founders and major shareholders, Ramachandran Ottapathu and Farouk Ismail to continue buying more ordinary shares of the retailer at every available opportunity. Since the reinstatement of the company securities at BSE, the two founders have been buying back shares thus igniting rumours that there could be plans to delist the company and turn it private again.  

The return to profitability…

The two directors are increasing their shareholding at a time when the retailer is making a recovery, posting the first profit in more than four years. For the six months ended December 2020, the enterprise reported a profit of P37.7 million, a turnaround from the P139.2 million loss registered in the 2019’s half year results. In the financials for the year ended June 2021, the group reported a P60 million profit, up from the P370 million recorded in 2020, and marking the first time the retailer registered a full year profit since 2016. The turnaround has been attributed to restructuring the business, following the exit from under- performing investments.

In 2020 Choppies closed its retailers in South Africa, Kenya, Tanzania and Mozambique following a failed expansion strategy that nearly sunk the company. The expansion weighed heavily on Choppies and caused a rift between company founders and shareholders who were troubled by the diminishing profits and dividends.

Stuck at 49 Thebe from P1.15 …..

Despite this return to profitability and the numerous transactions by the founders, the share price got stuck at 0.60 thebe for a while before going to a record low of P0.49 – its closing price this past week. The current share price is lower than the retailer’s listing price of P1.15 per share when it listed on the BSE in 2012. The latest data shared by BSE for the period January – May 2022 shows that Choppies share price went down by as much as 11.7 percent, making it one of the highly volatile shares at the local bourse.


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