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GCR Affirms Lewis Group Limited’s National Scale Issuer Rating Of A+(Za); Outlook Stable
LEWIS GROUP LIMITED
(Incorporated in the Republic of South Africa)
(Registration number 2004/009817/06)
JSE share code: LEW
ISIN: ZAE000058236
Bond Code: LEWI
("Lewis Group"; "Lewis"; the "group"; or "the Company")
GCR AFFIRMS LEWIS GROUP LIMITED'S NATIONAL SCALE ISSUER RATING OF
A+(ZA); OUTLOOK STABLE
Lewis Group is pleased to advise that on 27 August 2024 Global Credit Ratings
("GCR") affirmed Lewis Group Limited's long and short term national scale issuer
ratings at A+(za) and A1(za) respectively. The Outlook is Stable.
The ratings are as follows:
National long-term issuer rating: A+(za)
National short-term issuer rating: A1(za)
Outlook: Stable
The announcement released by the GCR is as follows:
Lewis Group Limited's (Lewis or the group) ratings reflect its resilient business model
and continued expansion, which has allowed stable operating performance through
cycles, even in challenging conditions. The strength of the group's financial position
and its financial flexibility is expected to comfortably absorb pressures of its growing
credit book.
Lewis' business profile benefits from a strong local franchise, underpinned by its well-
established traditional brand assortment in the homeware space and extensive store
network in close proximity to high density urban and rural hubs. The group plans to
add at least 20 new stores to its large 869 store base during financial year 2025,
ending 31 March, which will also include the rollout of its standalone bed outlet. Lewis
holds particularly strong market share in the lower LSM consumer segment, where its
value positioning in consumer durable products and consumer finance division
remains appealing even through weak economic cycles. Accordingly, merchandise
sales, at 57% of overall revenues, are complemented by 32% from the financial
services division (including optional microinsurance products). Whilst Lewis has
diversified somewhat into the higher-income segment and cash sales through the UFO
brand, the ratings remain constrained by its relatively smaller size and narrow sales
concentration compared with broader retail peers in a highly competitive market. The
group also has limited geographic breadth and is thus vulnerable to the
macroeconomics of South Africa, specifically discretionary consumer spending and
the credit cycle.
The ratings positively factor in the group's solid earnings track record despite
turbulence in the domestic economy over the last few years, with 5-year CAGR growth
in revenue registering at 6%. Financial 2024 saw particularly strong revenue growth
of 9.8% to ZAR8.2 billion (USD457 million) from both an uptick in merchandise sales
from traditional brands and the interest revenue from higher credit sales and interest
rates. The operating margin remains pressured but resilient, reported slightly higher
at 8.4% (GCR calculated) from 8.2% in financial 2023. Cost pressures include inflation,
supply chain challenges and significant growth in the credit book (up 16.9% on an
annual average basis over the past three years). However, Lewis' debtors book has
performed above expectations due to a tightly managed lending appetite and
collection strategy. Collection rates continue to register at record levels of 79.7%
(financial 2023: 80.8%), while provisioning for the total loan book appears appropriate.
We believe the group remains well positioned to defend its market share and generate
sustainable operating cash flows despite the currently weaker consumer climate and
shipping supply disruptions. Over the medium to longer term, profitability is likely to
benefit from a turnaround at UFO, new stores opening, sustained volume growth,
normalisation in the credit book and consistent cost discipline.
The group's leverage profile is strong despite the incrementally higher reliance on
short-term bank funding due to working capital demands as the credit book grows. Net
debt to EBITDA, including lease liabilities, rose to 1.4x at financial 2024 (financial
2023: 1.2x), but is conservative. We expect this ratio to remain broadly flat, reflecting
steady profitability. We estimate operating cash flow to total debt to remain softer at
28-35%, with net Interest cover near 8x (financial 2024: 7.7x). The group is also
expected to continue to display ample headroom to financial covenants.
Liquidity remains well managed due to Lewis' flexible capital-allocation approach,
which balances possible capex, working capital needs and shareholder returns. GCR
calculated liquidity coverage over the next 12 months expected at 1.5x. Continued free
cash flow generation, supported by collections on credit products, and ample funding
facilities should provide sufficient headroom for modest annual capex of ZAR100m-
ZAR130m and maturing short term debt obligations for working capital. Committed
undrawn revolving credit facilitates facilities currently total ZAR350m, whilst the group
has access to ZAR1.1 billion in call facilities (which are expected to be upsized) that
can be utilised to support working capital.
Outlook statement
The Stable outlook reflects GCR's expectation that Lewis will be able to maintain its
strong financial profile, including its modest leverage, despite pressures of the current
macroeconomic conditions and growing credit book.
Rating triggers
Rating upside is limited and would require sustained improvements in economic
conditions in South Africa in tandem with consistently strong operating momentum
over the medium to longer term, with operating margins of 10-12% on a consistent
basis, or an improvement in scale and diversification. Credit metrics and liquidity would
also have to be maintained at very strong levels.
A downgrade could follow a significant deterioration in revenue and profitability, which
could stem from a more challenging operating environment and weakening debtors'
book. If financial policy turns more aggressive through business growth and/or
shareholder returns, or if liquidity weakens, this could also place pressure on the
ratings.
The information contained in this announcement has not been reviewed or reported
on by the Company's external auditors.
Cape Town
27 August 2024
Sponsor: The Standard Bank of South Africa Limited
Debt Sponsor: Absa Bank Limited, acting through its Corporate and Investment
Banking Division
Date: 27-08-2024 01:15:00
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