CHOPPIES ENTERPRISES LIMITED. Tel:

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1 CHOPPIES ENTERPRISES LIMITED Analyst: Aobakwe Mokgethi Tel:

2 EQUITY RESEARCH BOTSWANA DECEMBER 2011 CHOPPIES ENTERPRISES Ltd Choppies Enterprises Limited, Choppies, enters the market through an Initial Public Offering 43.5m shares at a sale price of BWP 1.15 per share and the subsequent listing of 173.9m shares. Choppies is the market leading mass grocery retailer in Botswana, and retails fast moving consumer goods, household goods, fruit and vegetables, meat products, dry, fresh and baked goods through its stores in Botswana and South Africa. The Group operates 49 stores in Botswana, and 9 stores in South Africa. The stores generally cater for consumers in the middle to lower segments of the retail market and currently services in excess of 30% of the Botswana mass grocery retail market, making the Group the strongest player in the market. On average, the Botswana stores complete 4.0m transactions per month at an average basket size of BWP 50 (USD 6.69) (FY 2010: BWP 47; FY 2009: BWP 44). The Group s retail chain comprises of superstores and hyperstores. The key criterion for the selection of the type of store is the location and population density of the area. Superstores offer a full supermarket service offering bakery, butchery, fruit and vegetable products. These stores generally have a size of more than 1,000m². The superstores are the Group s largest revenue earner. Hyperstores are at least 3,000m² in terms of trading area and are located in the more urban areas, thus attracting consumers who demand more variety. The group also has distribution centres which function as a central sourcing for the Choppies stores. The distribution centres negotiate prices and enter into agreements with suppliers and charge fees for delivery and handling. Currently there are two centralised distribution centres, one of 10,000m² located in Gaborone and the other of 3,000m² in Lobatse. A distribution centre of 10,000m² is being constructed for the Group in Rustenburg, South Africa to be operational within FY 12. This will enable rapid expansion of new stores in South Africa. This distribution centre is a critical component in the expansion plans for the South African business. Choppies has competitive advantage over its peers in key areas such as geographical footprint, distribution network and customer base, in-house logistics, supply, and distribution, and bulk purchasing power. We arrive at a DCF valuation for Choppies of BWP 1.62 per share, 40.6% upside on its current listing price of BWP Choppies has higher margins when compared to its regional peers. The Group continues to gain market share in Botswana while the expansion of its footprint in South Africa should bear fruit going forward. PARTICIPATE. CHOPPIES PARTICIPATE Listing price (BWP) 1.15 Current price (US$) 0.15 Target price (BWP) 1.62 Upside/Downside 40.6% 12 month High/Low (BWP) n/a Liquidity Market Cap (BWPm) 1,350.3 Market Cap (US$m) Shares (m) 1,174.2 Free Float (%) 26% Ave Monthly value traded (US$m) Ave Monthly volume (m) n/a n/a Financials F 2013F EPS (BWP) DPS (BWP) NAV/Share (BWP) Gross Profit Margin (%) 18.3% 18.6% 18.8% FINANCIAL SUMMARY (BWPm) F 2013F Operating profit Profit before tax Attributable earnings RATIOS ROE 52.2% 42.6% 40.8% ROA 19.5% 13.9% 15.5% Current ratio (x) Debt/Equity (%) 29.7% 25.2% 21.2% VALUATION RATIOS PBV (x) PER (x) Dividend Yield (%) 13.8% 4.3% 5.3% INPORTANT DATES Opening date 23 Nov Last date for the application 11 Jan Expected closing date 11 Jan Expected listing date 26 Jan STRENGTHS Countrywide presence High gross margins Strong brand name OPPORTUNITIES Regional expansion Local expansion Capture middle income segment Low debt to equity WEAKNESSES EBITDA margin erosion (Bots) THREATS Intisified competition Rising food prices

3 Nature of business and brief history Choppies is the market leading mass grocery retailer in Botswana, and retails fast moving consumer goods, household goods, fruit and vegetables, meat products, dry, fresh and baked goods through its stores in Botswana and South Africa. The Group operates 58 retail outlets in Southern Africa, comprising of 49 stores in Botswana, and 9 stores in South Africa. The business was founded by the Chopdat family in The first store was opened in Lobatse trading as Wayside Supermarket (Pty) Limited, with a second opening in The Group has grown exponentially since 1999, and has grown to become the largest food retail chain in Botswana. Organogram Choppies Enterprise Limited Holding Company Safrosh Holdings Supplier of meat products to Choppies Supermarkets Choppies Distribution Center Warehouse stock for distribution to Choppies stores Wholly owned Choppies supermarket subsidiary companies Supermarkets which are wholly owned through separate companies and operate in Botswana Choppies Supermarkets South Africa (Pty) Ltd There are 9 supermarkets which operate in South Africa within the company Amphora Provider of maintenance services Well Done Provides logistical services to Choppies supermarkets Motopi Holdings Supplier of fruit and vegetable product to the public and Choppies stores Shoppers Paradise Supplier of fruit and vegetable product to the public and Choppies stores Choppies footprint

4 FY 11 Financial & Operational Review Income Statement Revenue increased by 13.7% to BWP 2.4bn (USD 319.3m) in FY 2011 driven mainly by the opening of new stores both in Botswana and South Africa, growth in the Choppies house brands (which have higher margins)and product mix. Revenue is forecasted to grow by 41.0% to BWP 3.4bn in FY 2012, driven mainly by an increase in trading space as a result of the opening up of 8 new stores in Botswana to bring the total number to 56, and a further 7 stores in South Africa to bring the total 16 stores by the end of FY The cost of the store roll out in Botswana is forecast to be BWP 75.5m, while the roll out in South Africa will require an investment of ZAR 62.0m. Gross profit for FY 2011 stood at BWP 447.0m, representing a gross profit margin of 18.3%, a marginal increase from the prior period (FY 2010: 18.2%). Gross profit margin is forecasted to increase to 18.6% in FY Gross profit margins in Botswana is expected to be driven by the continued strategy of promoting inhouse brands, which currently constitute 12% of sales, and the expansion of convenience foods, butchery, bakery and bakery offerings which also offer higher margins. These products currently constitute only 3.5% of sales. Gross profit margins are expected to grow significantly in South Africa as the company begins to reap the benefit of economies of scale, and the opening of a 10,000 m² centralised distribution centre in Rustenburg during FY The continued enhancement of EBITDA margins in Botswana is expected to be eroded by the continued investment in governance procedures, higher IT costs and the generally increased administrative burden associated with a public company. The South African business will turn a profit for the first time with an expected EBITDA margin of 6.1% in FY In aggregate, the EBITDA margins for the Group will increase from 6.5% to 7.1%. Balance sheet Total assets for the period under review increased by 84.3% to BWP 823.8m, mainly as a result of additional goodwill of BWP 282.1m (FY 2010: BWP 0.37m) which was recognised as a result of the acquisitions of controlling interests in new subsidiaries. As at FY 2011, total debt amounted to BWP 86.1m representing a debt to equity of 29.7% (FY 2010: 76.7%). This decrease was mainly as a result of an issue of new shares during the period rather than a decrease in the debt level. Cash flow statement Net cash flow generated from operations decreased by 58.2% to BWP 27.7m. The decrease was mainly as a result of a BWP 123.2m dividend paid (FY 2010: BWP 60.6m), in order to fully utilise the Additional Company Tax (ACT) credit, which fell away in July 2011 as a result of tax legislation changes. Income Statement (BWPm) FY2010 FY2011 % ch Revenue 2,142 2, % Gross profit % Expenses (267) (301) 12.6% Operating profit % Net finance income/(loss) (10) (9) -15.1% Profit before tax % Attributable earnings % Balance Sheet (BWPm) FY2010 FY2011 % ch Non current assets % Current assets % Total assets % Total equity % Non current laibilities % Current laibilities % Total assets and liabiities % Cashflow Statement (BWPm) FY2010 FY2011 % ch Cash from operations % Cash used in investing activities (60) (72) 19.8% Cash from financing activities % Increase/(decrease) in cash 8 (8) % Cash a at year end % Gross profit margin 18.2% 18.3% 0.1% Cost to income ratio 35.8% 46.7% 10.9% RoE 86.5% 52.2% -34.2% RoA 20.4% 19.5% -0.9% Debt/Equity 76.6% 29.7% -46.8% DPS (t) % Shareholder Information Shareholder* % Ramachandra Ottapathu Farouk Essop Ismail Festus G. M ogae 3.84 M inorities 2.48 Total * pre-listing Shareholder** % Ramachandra Ottapathu Farouk Essop Ismail Festus G. M ogae 3.40 M inorities 2.20 Placees General public 3.70 Other 0.10 Total **post-listing

5 Outlook Botswana Revenue for FY 2012 is forecasted to grow by 18.2%, with 8 new stores contributing 10% and the existing stores contributing the balance. In future, the anticipation is that the group in Botswana will continue to experience real growth, above inflation by reason of: Capturing more of available consumer spend by increasing product offering (for example the introduction of cosmetics and pharmaceuticals); Leveraging off the existing store network and placing it at the disposal of third party vendors (for example money transfers with cellular network operators); Capitalising on the trend of a move away from wholesale to the formal retail market; an increment in the contribution of house-branded products which drive improved margins; and An increment in the average percentage of sales of group in-house butcheries, bakeries, and takeaways. Trend in margins 20.0% 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% Gross profit margin EBIT margin PBT margin South Africa The start-up of a critical mass of stores has been achieved; and the existing stores in South Africa are profitable. The existing and new stores will benefit from significant growth through significant margin improvement, brought about by: The establishment of a distribution centre in Rustenburg (due to come on stream within FY 2012). The group will exploit its strategy of developing stores along the route of supply and distribution from key points in South Africa to Gaborone. This will be achieved by supplying competitively priced products into the target market along that route, and within a defined area around a distribution centre in Rustenburg, which target market is the same as that in Botswana, and which is not properly focused upon nor serviced by existing retailers. The group sees an effective roll-out along the supply and distribution route and in an area of 500km around Rustenburg, of more than 20 stores over the next 2 years Debt to equity trends 220% 180% 140% 100% 60% 20% Debt (BWP'mn) Equity (BWP'mn) Debt/equity Southern Africa In the longer term, the group will consider the opportunities to expand into the Southern African region, with Mozambique, Zambia and Tanzania as the most likely targets. The group has begun exploiting its bulk purchasing power to source products from countries other than South Africa, which offer improved products at better prices, which will enable better pricing to consumers, and improve margins across the Group. Valuation and Recommendation We arrive at a DCF valuation for Choppies of BWP 1.62 per share, 40.6% upside on its current listing price of BWP Choppies has higher margins when compared to its regional peers. The Group continues to gain market share in Botswana while the expansion of its footprint in South Africa should bear fruit going forward. PARTICIPATE. Peer Comparison Choppies *Pick n Pay *Shoprite *Spar EBITDA margin 8.5% 4.4% 6.2% 4.1% EBIT margin 6.2% 3.0% 4.9% 3.8% Net profit margin 5.1% 2.0% 3.3% 2.6% Return on avg assets 19.5% 10.4% 12.4% 12.8% Return on avg equity 52.2% 58.0% 40.8% 42.9% Source: company data *South Africa

6 Financial Summary 31 June Income Statement (BWP m) F 2013F Revenue 1,389 1,919 2,142 2,435 3,434 4,224 Gross profit Operating profit Profit before tax Profit after tax Ratios EPS (t) Dividend payout ratio 21.7% 40.5% 73.4% 104.5% 50.0% 50.0% Gross margin 15.5% 17.7% 18.2% 18.3% 18.6% 18.8% Operating margin 4.3% 6.0% 6.1% 6.2% 5.1% 4.9% PBT margin 3.5% 5.5% 5.7% 6.7% 4.7% 4.6% NI Margin 2.8% 4.0% 4.0% 5.1% 3.5% 3.4% Growth Ratios Sales growth 38.2% 11.6% 13.7% 41.0% 23.0% Gross profit growth 57.5% 15.1% 14.6% 43.2% 24.4% Operating profit growth 91.9% 14.5% 14.4% 16.3% 19.6% PBT growth 114.8% 14.9% 34.2% -1.4% 21.4% PAT growth 96.9% 10.8% 45.8% -3.8% 20.9% Margins Gross margin 15.5% 17.7% 18.2% 18.3% 18.6% 18.8% Operating margin 4.3% 6.0% 6.1% 6.2% 5.1% 4.9% PBT margin 3.5% 5.5% 5.7% 6.7% 4.7% 4.6% PAT margin 2.8% 4.0% 4.0% 5.1% 3.5% 3.4%

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