Choppies fights technical insolvency after $125m loss

Botswana-based Choppies Enterprises is fighting technical insolvency after incurring $125 million loss on the closure of its operations in Kenya, Tanzania, South Africa and Mozambique two years ago.

The retailer, which is listed on the Botswana Stock Exchange and cross-listed on the Johannesburg Stock Exchange, revealed through its 2022 integrated annual report that it is facing a negative equity position after its liabilities grew faster than assets following its exit from the four markets.

The firm’s negative equity jumped by more than fivefold to BWP467.05 million ($34.43 million) in 2020 from BWP 80.14 million ($5.9 million) in 2019.

Its negative working capital deteriorated to BWP 658.37 million ($48.54 million) from BWP497.78 million ($36.7 million) in the same period.

Negative equity

“The main reason for the group’s negative equity situation was the losses incurred and closure costs of BWP1.7 billion ($125.35 million) for the now discontinued operations in South Africa, Kenya, Tanzania and Mozambique,” the firm said

“This requires the group to continuously consider its going concern status and places a strain on expansion as well as the ability to pay shareholders dividends. The rate at which the negative equity reduces is currently dependent on the net profits generated by the group.”

Technical insolvency arises when the value of the company’s liabilities rise at a faster rate than that of its assets due to increased debts or borrowings, making it difficult for the company to meet its short term financial obligations.

This differs from actual insolvency or cash flow insolvency, which occurs when a company is unable to make promised payments to vendors or lenders.

Poor performance

In 2022 the retailer reduced the negative equity by BWP107 million ($7.89 million) to BWP341 million ($25.14 million) from BWP448 million ($33.03 million) mainly due to trading profits.

Its negative working capital position worsened to BWP 403 million ($29.71 million) from BWP 400 million ($29.49 million).

“At the current level of total comprehensive income, we should trade out the negative equity in three years. If we consider the founding shareholder’s loans as quasi-equity, the group’s negative equity is BWP228 million ($16.81 million),” the firm said.

During the financial year ended June 30, the group made a net profit of BWP145 million ($10.69 million) compared to BWP60 million ($4.42 million) in 2021.

Cumulative losses

However, in five years (2016 to 2020) the group made cumulative losses of BWP 1.58 billion ($116.5 million), largely due to poor performance of its heavily indebted subsidiaries.

“A recapitalisation to strengthen the balance sheet may have to be considered in the near future,” the firm said.

“The divestment from the loss-making regions in South Africa, Mozambique, Kenya and Tanzania has been completed and the drain from these regions on the group results has ended.”

Choppies is the largest retailer in southern Africa outside of South Africa, with 161 stores across Botswana (92), Zimbabwe (32), Zambia (28) and Namibia (9).

“We expect continued uncertainty in our business and the Southern African economy due to the duration and intensity of global credit conditions which have turned more negative on rising interest rates, the Russia-Ukraine military conflict, slower economic growth, surging prices for energy and commodities, renewed supply-chain disruption, financial market volatility, volatility in employment trends and consumer confidence, all of which may impact our results,” the firm said.