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LEWIS GROUP LIMITED - Lewis group credit ratings and outlook affirmed

Release Date: 25/09/2014 11:10
Code(s): LEW     PDF:  
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Lewis group credit ratings and outlook affirmed

Lewis Group Limited
Reg no: 2004/009817/06
JSE Share Codes:
LEW ISIN: ZAE000058236
LEW01 ISIN: ZAG000110222
(the "Company”, “Lewis Group” or “the Group”)



LEWIS GROUP CREDIT RATINGS AND OUTLOOK AFFIRMED

Lewis Group is pleased to advise that Global Credit Ratings (“GCR”) affirmed the
group’s credit ratings and outlook on 23 September 2014.

The ratings are as follows:

National long-term rating: ‘A(za)’

National short-term rating: ‘A1(za)’

Outlook: Stable

The ratings were initially assigned by GCR in September last year ahead of the launch
of Lewis Group’s R2 billion domestic medium-term note programme.

The announcement released by GCR follows:

“Global Credit Ratings has accorded the above credit ratings to Lewis Group Limited
(“Lewis”) based on the following key criteria:

Lewis is an established domestic furniture/durable retailer, with its extensive branch
network spanning the entire country and several neighbouring countries. The group is
predominantly a credit retailer, with its relatively low gross margins on product sales
being augmented by the finance and related income earned on credit extension.
Reporting three store brands, the group’s business model is largely decentralised, with
customer relations mostly undertaken at a store level.

As more than 70% of its sales are made on credit, Lewis’ earnings and cashflows are
strongly impacted by its debtors. To this end, the group reports a sophisticated
centralised credit vetting and extension model, while debtors management is mainly
undertaken at a store level. Notwithstanding the impact of the adverse economic climate
(with 30% higher debtor costs and a slight reduction in fully performing debtors in F14),
Lewis’ debtors book has considerably outperformed its listed peers, attesting to the
veracity of its business model.

Notwithstanding the worsening debtors performance, Lewis’ liquidity has strengthened
over the past year. This has been a result of the initiation of its listed debt programme,
which has increased its financial flexibility and enabled it to increase unused bank
funding lines. Note is also taken of the sizeable cash balances reported at FYE14, as
well as the fact that the group’s asset base is entirely unencumbered; further boosting
financial flexibility. In addition, the ability to tighten underwriting criteria and reduce credit
origination is a tool available to management to improve cash flows if needed. Thus,
despite continued working capital pressure associated with growth, Lewis has reported
positive operating cash flows over the review period. With limited capex (as stores are
typically leased and not owned), this has enabled moderate gearing levels and sound
debt serviceability to be sustained. Further to this, net gearing and net debt to EBITDA
were slightly lower at 24% and 105% respectively at FYE14 (FYE13: 30% and 111%),
while net interest cover remained sound at 10.5x (F13: 12.8x).

The South African economy reports structural deficiencies, manifesting in high
unemployment. Together with rampant credit extension, this has resulted in a highly
indebted consumer base that is reporting significant financial duress. In this context, the
growth of the group exposes it further to this credit risk, and could potentially have a
strong negative impact on cash flows and debt serviceability. Nonetheless, given the
environment, revenue growth is likely to remain sluggish in F15. Cognisance is also
taken of potential changes to legislation that could limit the credit life insurance fees
charged by Lewis to its clients, as well as heightened regulatory scrutiny of industry
lending practices.

Upward rating migration is only likely over the medium to long term, should revenue and
earnings growth persist. Such upward rating migration would also be predicated on an
improvement in domestic economic conditions, and in particular consumer health. In
contrast, a change to the regulatory environment that adversely impacts on finance
and/or insurance income, or a further worsening of the credit retail environment
(affecting both top line growth and leading to higher bad debt costs), could induce
negative ratings action.”

Cape Town
25 September 2014

Sponsor: UBS South Africa (Pty) Ltd

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