Choppies is running at a high speed in a race against time to avoid the risk of being delisted from the Botswana Stock Exchange Limited (BSEL) end of this month.
Release of financials remains a thorn for Choppies as many believe the retail giant is a sinking ship following explosive speculations on its financial operations, delay of financial results and a fight for shares at Choppies Zimbabwe. Earlier this week, BSEL warned Choppies to release audited financial statements for the ended June 2018 or face strict repercussions. According to a statement released by BSEL, Choppies is in contravention with the BSEL Listing Requirements and “is under threat of suspension and possible termination.”
In an interview with BusinessPost this week, Choppies CEO Ramachandran Ottapathu promised that they will release the results before the stipulated time and that the retailer will not be delisted. Motswedi Securities Head of Research Garry Juma said in an interview that he personally does not think Choppies will risk being delisted. He was confident that before the end of October, Choppies would have listed.
Choppies failure to release financial results saw the local grocer being suspended from the BSEL on 21 September resulting in its share price dropping drastically from P1.25 to 40 thebe. The suspension of Choppies took six days, and prompted a lot of activity in the JSE where its value fell by 85 percent. After the fall, the price rebounded by 22 thebe in the BSEL to trade at 62 thebe.
According to Motswedi Securities recent Weekly Financial Markets Highlights, it will take time for the retailer to recover from its crash. “…the likelihood of the stock recovering all of the losses , of which currently stand at -74.4%, in the remaining three months are very slim, considering that they have already notified the public that they expected a profit after tax decline of 20% or more in a trading statement on the 21st of September,” said Motswedi Securities.
Motswedi Securities has also observed that investor confidence in the stock has waned considerably and without any further clarification on the company’s situation, a lot of uncertainty may cloud the performance of the stock. Choppies is estimated to have lost about P1.7 billion in value following the drop in share price. Ottapathu has relieved that on paper in the past weeks Choppies would have lost almost quarter of a billion but “everything is going well operationally despite all the speculations.”
Ottapathu believes the Choppies fall in value is due to delay of financial statements which created a lot of perception and speculation in the market. A change of auditors from KPMG to PricewaterhouseCoopers (PwC) is blamed in delay of financial results and Choppies recently released a statement saying:
“The Board of Directors of Choppies Enterprises Limited advises that they have instructed management to perform more detailed procedures on verification and valuation of inventory in conjunction with the new external auditor PricewaterhouseCoopers (PwC), appointed on 31 January 2018. This process will only be completed by 30 April 2018 and hence creates uncertainty regarding the impact of any potential adjustments, if any, on the results.”
Choppies share price over-punished and the JSE effect
Market researcher Juma is of the view that the Chopppies price was “over-punished” because of Zimbabwe shareholder fight and the delay of financial results. He believes that Choppies should have made a quick statement of clarification on any issue which threatens to mar its reputation or lessen investor confidence. According to him, clarity should have been made on delay of financial results and the Zimbabwe shareholder war.
Juma also stated that the Choppies share price fall in BSEL was because of the influence from the big market that is the Johannesburg Stock Exchange (JSE). Juma said Choppies fall in value was a trend set in South Africa where investors were having fears over the Zimbabwe shareholding saga and delay of financial results, the retailer was following suit of what is happening in the JSE.
Juma explained that JSE is a huge market which can influence market trends of smaller markets like the BSEL. The researcher explained the sensitivity of the South African economy which can be ‘touched by anything’ as the South African Rand also thrives in “free floating exchange rate.” He was explaining a scenario of if JSE catches flu, BSEL would catch flu too.
Choppies, Shoprite scramble for Africa
Choppies, built from humble beginnings from a hilly beef town of Lobatse, grew in leaps and bounds and became a force to be recon with for years. In 2012 Choppies listed on BSEL with market capitalization of P2.4 billion and three years later it got its secondary listing on JSE and listed about 277-million ordinary shares at R4.90 per share. After JSE listing Choppies embarked on a crusade of taking over Africa retail markets and market its presence in neighboring countries like South Africa.
But there was another bull on the kraal in Shoprite, a big player for decades, to compete with Choppies. Market observers believe Choppies has failed in the South Africa market and according to Juma, the South African retailer remains with an upper hand over the local grocer. As Choppies’ rise almost diminished the presence of Shoprite in Botswana, the case is vice versa at South Africa and Juma believes this market dynamics will take a long time to change.
Just days after the last month’s decline in Choppies market value, a South African analyst predicted in the Business Day that the fall in the local retail price could make it a target for the likes of Shoprite while Choppies was still under pressure. The analyst sees Choppies as a “small player in a big pond. Also, this publication has recently intercepted information that Shoprite may be planning to “take Choppies out of the game” by a hostile takeover following the local retailer’s market misfortunes. Information from the JSE suggests that Shoprite may be involved in “fronting for Choppies shares.” Ottapathu was not aware of such move by Shoprite and the South African retailer did not respond to our questions on the issue before press time.
However some market enthusiasts are doubtful that Shoprite sees Choppies as a rival, but it is “just an irritant.” According to observers, it is unlikely that there was anyone buying a lot of Choppies shares without buying during the past couple of days as this may be a possibility for a hostile takeover to happen.
Juma also does not buy the logic that Choppies may be up for a hostile takeover, putting his confidence on two major shareholders Ottapathu and Farouk Ismail, saying they will not let that happen so easy. He said “not now, not anytime soon.” Juma reminded how the two men build Choppies from humble beginnings to a retailer giant it is today.
Adamant and unmoved by the recent market misfortunes that happened for Choppies, Ottapathu told BusinessPost that a hostile takeover by anyone whether bigger than Choppies or small, is impossible. Ottapathu was unfazed saying business will go on like normal and financial results will soon be released in few days. Shoprite refused to comment allegation of its attempted hostile take-over of Choppies but said: “Regrettably we cannot comment on any public speculation.”
Following a devastating first half of the year 2020 due to COVID-19, the global diamond industry started gaining positive momentum towards the end of the year as key markets entered into thanks giving and holiday season.
However Bruce Cleaver, Chief Executive Officer of De Beers Group cautioned that the industry is not out of the woods yet, citing prevailing challenges ahead into 2021.
The first half of 2020 was characterized by some of the worst challenges in history of global diamond trade.
The midstream, where rough diamonds are traded in wholesale and bulk to cutters and polishers, was for the most part of second quarter 2020, suffocated by international travel restrictions as countries responded to the contagious Corona Virus.
This halted movement of buyers and shipment of the rough goods , resulting in unprecedented decline of sales, in turn ballooning stockpiles as the upstream operations produced with little uptake by the midstream.
The situation was exacerbated by muted demand in the downstream where jewelry industries and tail end retailers closed to further curb the spread of COVID-19.
However towards the end of third quarter getting into the last quarter of the year, demand in both midstream and downstream started to steadily pick up as countries relaxed COVID-19 restrictions.
De Beers, the world’s largest diamond producer by value started reporting significant recovery in sales in the sixth and seventh cycle, figures began to reflect an upswing in sentiment as well as increase in uptake of rough goods by midstream.
Sales for the sixth cycle amounted to $116 Million, following a sharp downturn in the previous cycles, significant jump was realized during the seventh cycle, registering $320 million, an over 175 % upswing when gauged against the proceeding cycle.
De Beers noted that diamond markets showed some continued improvement throughout August and into September as Covid-19 restrictions continued to ease in various locations.
“Manufacturers focused on meeting retail demand for polished diamonds, particularly in certain product areas, accordingly, we saw a recovery in rough diamond demand in the seventh sales cycle of the year, reflecting these retail trends, following several months of minimal manufacturing activity and disrupted demand patterns in all major markets,” said De Beers Chief Executive, Bruce Cleaver in September last year.
The diamond mining behemoth continued to register impressive sales in the eighth and ninth cycle signaling the industry could end the year on a positive note.
The momentum was indeed carried into the last cycle of the year. The value of rough diamond sales (Global Sightholder Sales and Auctions) for De Beers’ tenth sales cycle of 2020 amounted to $440 million, a significant increase from the 2019 tenth sales cycle value.
Against what seemed like a positive year end that would split into the New Year Bruce Cleaver, CEO, De Beers Group, however warned the industry not to count eggs before they hatch.
“Positive consumer demand for diamond jewellery resulting from the holiday season is supporting the continuation of retail orders for polished diamonds from the diamond industry’s midstream sector. This in turn supported steady demand for De Beers’s rough diamonds at our final sales cycle of 2020,” Cleaver had said in December.
In caution the De Beers Chief noted that “While the diamond industry ends the year on a positive note, we must recognise the risks that the ongoing Covid-19 pandemic presents to sector recovery both for the rest of this year and as we head into 2021.”
All segments of the supply chain were severely impacted by the global lockdown measures introduced in response to the Covid-19 pandemic in the first half of 2020.
After a strong US holiday season at the end of 2019, the rough diamond industry started 2020 positively as the midstream restocked and sentiment improved.
However, from February 2020, the Covid-19 outbreak began to have a significant impact on diamond jewellery retail sales and supply chain, with many jewelers suspending all polished purchases and/or delaying payments to their suppliers.
Rough diamond sales were materially affected by lockdowns and travel restrictions, delaying the shipping of rough diamonds into cutting and trading centers and preventing buyers from attending sales events.
These resulted in significant decline in total revenue for the business in the first six months of 2020. Total revenue decreased by 54% to $1.2 billion from $2.6 billion registered in the prior half year period ended 30 June 2019.
For the entire first six (6) months of the year 2020 De Beers Rough diamonds sales fell drastically to $1.0 billion from $2.3 billion in the prior H1 period ended 30 June 2019. Sales volumes decreased by 45% to 8.5 million carats compared to 15.5 million carats registered in the prior period.
Next month Minister of Finance & Economic Development, Dr Thapelo Matsheka will face the nation to deliver Botswana‘s first budget speech since COVID-19 pandemic put the world on devastating economic trajectory.
The pandemic that broke out in late 2019 in China has put the entire world on unprecedented chaos ,killing over P1 million people across the globe , shattering economies and almost rendering the year 2020 – a 12 months stretch of complete setback.
The 2021/22 budget speech will come at time when Botswana’s economy is still trying to emerge out of this.
National lockdowns and local travel restrictions have hit small medium enterprises hard, while international travel restrictions halted movement of both good and people, delivering by far some of the heaviest and worst catastrophic blows on the diamond industry and tourism sector, the likes of which this country has never seen before on its largest economic sectors.
As Minister Matsheka faces parliament next month, the reality on the ground is that Botswana’s national current cash resource, the Government Investment Account (GIA) is depleting at lightning speed.
On the other hand the COVID-19 economic mess is prevailing, the virus is reported to have taken a new dangerous shape of a deadly variant, spreading like fueled veld fire and causing some of the world’s super powers back to tough restrictions of lockdown.
According official figures released by Bank of Botswana, in October 2020 the GIA was running at P6 billion compared to the P18.3 billion held in the account in October 2019.
However reports indicate that the account could be currently holding just about P3 billion. The draw down from the GIA has been by exacerbated by declining diamond revenue, the country‘s largest cash cow. The sector was experiencing significant revenue decline even before COVID-19 struck.
When the National Development Plan (NDP) 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at a budget deficits.
This as explained by Minister of Finance in 2017 would be occasioned by decline in diamond revenue mainly due to government forfeiting some of its dividend from Debswana to fund mine expansion projects.
Cumulatively, since 2017/18 to 2019/20 financial year the budget deficit totaled to over P16 billion, of which was financed by both external and domestic borrowing and drawing down from government cash balances.
Taking into account the COVID-19 economic mess in 2020/21 financial year, the budget deficit could add up to P20 billion after revised figures.
Drawing down from government cash balances to finance these budget deficits meant significant withdrawals from the Government Investment Account, hence the near depletion of this buffer.
Meanwhile should Botswana’s revenue streams completely dry up to zero levels; the country would only have 11 months, before calling out for humanitarian aids and international donors, because foreign reserves are also on slow down.
During 2019, the foreign exchange reserves declined by 8.7 percent, from Seventy One Billion, Four Hundred Million Pula (P71.4 billion) in December 2018 to Sixty Five Billion, Three Hundred Million Pula (P65.3 billion) in December 2019.
The reserves declined further in 2020, falling by 2.3 percent to Sixty Three Billion, Seven Hundred Million Pula (P63.7 billion) in July 2020. This was revealed by President Masisi during State of the Nation Address in November last year.
The decrease was mainly due to foreign exchange outflows associated with Government obligations and economy-wide import requirements.
However latest statistics(October 2020) from Bank of Botswana reveal that Botswana’s foreign reserves are estimated at P58.4 billion, with government’s share of these funds significantly low.
Government has since introduced several measures to contain costs and control expenditure with the most recent intervention being the halting of recruitment in government departments and parastatals.
Furthermore, Value Added Tax has been signaled to go up from 12% to 14% in April this year with more hikes and service fees anticipated as government embarks on unprecedented domestic revenue mobilization.
Botswana Stock Exchange listed hotel group Cresta Marakanelo Limited (“CML” or “the Company”) announced the signing of a lease agreement for Phakalane Golf Estate Hotel & Convention Centre, which will see CML extend its footprint by adding the 4 star Gaborone property to its already impressive portfolio. The agreement is subject to regulatory approvals therefore the effective date of the transaction is expected to be 1 February 2021.
CML brings a wealth of expertise to the lease and despite the difficult year for the tourism and hospitality industry, due to the impact of the COVID-19 pandemic, CML remains confident in the recovery of the sector and the need to invest in expanding the Company’s footprint.
CML Managing Director, Mr Mokwena Morulane commented: “Our continued efforts to improve our offerings, understand the market dynamics and modern day trends in the face of global challenges, means we are ready for the changing face of tourism and international travel, and this addition to the Cresta portfolio signals our confidence in the future.
“Despite the headwinds faced in 2020, Management has continued to focus on projects that enhance CML’s product offering such as the refurbishments at Cresta Mowana Safari Resort & Spa in the tourism capital Kasane and the ongoing refurbishment of Cresta Marang Residency in Francistown. The signing of the lease for the 4 star Phakalane Golf Estate Hotel & Conference Centre is a great addition to the Cresta portfolio and will unlock shareholder value in the future.
“We remain vigilant to value-enhancing opportunities including acquisitions or leases, after having reconsidered our pipeline against current and expected market conditions.”
Commenting on the lease agreement, the Chief Executive Officer, Mr S Parthiban, speaking on behalf of Phakalane noted; “No hotel chain holds as much expertise in the region, understands our local culture and tastes and what hospitality is about better than Cresta Marakanelo Limited. We believe that the renovations done to the property has made Phakalane Hotel and Convention Centre a unique product in Botswana and at par with international facilities. We believe that this lease will benefit not only us as Phakalane , but the market in general as Cresta has run hotels successfully in Botswana for over 30 years and is therefore expected to bring new offerings that appeal to the local and international markets as well as the residents and visitors to the Golf Estate. We look forward to a long mutually beneficial relationship with Cresta.”
CML like the rest of the tourism and hospitality industry and the entire value chain was hard hit by lockdowns with the surge of COVID-19. By investing during the low period, the company hopes to realise the future value of spending time in preparing for the new consumer dynamics and behaviour. Despite business interruptions as a result of a six-month long state of emergency and several lock-down periods declared by the Government of Botswana to limit the spread of COVID-19, the Company is starting to record an increase in occupancies, which bodes well for the recovery of the industry and the Company’s future prospects.