Botswana’s Choppies is well positioned to benefit from the growth of the formal retail segment in much of Africa, according to Peter C. Thoms, Founder & Portfolio Manager at Africa Capital Group.

“Retail is a tough and competitive business in southern Africa so we are not too fond of the sector at the moment—Choppies is a special situation,” Thoms said.

“Our current allocation to Choppies is about 2.5% of our (as yet) very small fund. The stock has run up a bit since we bought, but if it should pull back to an enticing level we would probably take a full position of around 4%,” he told Africa Global Funds.

Founded in 1986 and headquartered in Gaborone, Choppies is the leading grocery chain in Botswana.

The company commands about 34% market share in its home country and is expanding its very profitable business into other countries in Southern and East Africa.

At the beginning of 2015, the company had 72 stores in Botswana, 31 in South Africa and 18 in Zimbabwe—for a total of 121 stores; it also has 7 distribution centers.

“While Botswana accounts for the majority of the company’s business (66% of revenues and 86% of EBITDA), management has recognized a significant opportunity to bring Choppies’ business model to other areas of Africa that are under-served (or not served at all) by “formal” grocery chains,” said Thoms.

Choppies is well on its way to achieving its target of 200 stores in six countries by the end of 2016.

In June 2015, the company entered the Kenyan market with the purchase of 10 stores from Ukwala Supermarkets.

“It is also eyeing Tanzania and Zambia, where “formal” retail is currently deemed to account for less than 15% of the consumer sector,” said Thoms.

Since listing on the Botswana Stock Exchange in 2012‚ Choppies commenced a secondary listing on the Johannesburg Stock Exchange in May this year, raising nearly R600m ($48m) to help fund its expansion plans.

Thoms said that historically it has been very difficult for retailers to expand successfully and profitably away from their home markets: “This, in our view, is the major risk to the Choppies story.”

He added that the Botswana stores are mature and very profitable, but raised concern whether the company will be able to replicate this success outside of Botswana.

“We think it will do very well, as its distribution systems have been well honed over the last decade. However, we will be monitoring the company’s financial performance in the new markets it enters very closely,” he said.

“We believe that Choppies stock, even though it trades at an above average P/E multiple at the moment, will prove to be an excellent value for early investors who hold for the long term,” he added.

Africa Capital Group is an independent investment firm based in Coronado, California, USA.