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LEWIS GROUP LIMITED - Unaudited interim results for the six months ended 30 September 2014

Release Date: 10/11/2014 07:05
Code(s): LEW     PDF:  
Wrap Text
Unaudited interim results for the six months ended 30 September 2014

LEWIS GROUP LTD
Registration number: 2004/009817/06.
Share code: LEW. 
ISIN: ZAE000058236 
Bond code: LEW01 
Bond ISIN No. ZAG000110222

UNAUDITED INTERIM RESULTS
FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2014

REVENUE UP
1.6 %

GROSS PROFIT MARGIN
36.9 %

COST GROWTH CONTAINED AT
2.4 %

HEADLINE EARNINGS PER SHARE
372 CENTS

INTERIM DIVIDEND MAINTAINED AT
215 CENTS

Trading and financial performance

The trading environment remains extremely
challenging with the group's middle to lower income
target market under continued pressure. However,
the group's results for the six month period to
30 September 2014 show initial signs of a stabilising credit
environment with debtor cost growth slowing.

Revenue for the period increased by 1.6% supported
by increased financial services income owing to the
higher proportion of longer term contracts settling
in the base and higher levels of credit sales in the
previous financial years.

Trading conditions in August and September proved
particularly difficult owing to aggressive discounting
by competitors ahead of store closures. This resulted
in sales for the half year declining by 3.5% to
R1.13 billion.

The gross margin at 36.9% was slightly below the
targeted 37% to 38.5%. Management is however
confident of achieving this target for the full year.

Expenses continue to be tightly managed and the
growth in operating costs, excluding debtor costs,
was well contained to 2.4%.

The group's operating margin at 18.3% (2014: 20.6%)
was impacted by the higher debtor costs and slow
revenue growth, with operating profit declining 9.9%
to R472 million. Headline earnings of R330 million
were 11.3% lower than the previous year, with headline
earnings per share of 372 cents (2014: 420 cents).

Despite the lower earnings, the interim dividend has
been maintained at 215 cents per share, as the board
remains confident in the business model.

Inventory levels at period end were 9% higher due
to the slower than expected sales growth in the last
two months of the reporting period and higher stock
levels ahead of the festive season trading period.

The gearing ratio reduced to 24.1% (2014: 27.9%).

In September 2014 Global Credit Ratings affirmed the
group's national long-term credit rating as ‘A(za)' and
the national short-term rating as ‘A1(za)', with a stable
outlook, noting the group's robust business model.

Debtor management

Management is encouraged by the improving
collection trend as the increase in debtor costs for
the six months slowed to 27% from the 30% reported
for the four months ended July 2014. This reflects the
dual impact of a more stable labour market following
the settlement of the mining strikes and the enhanced
collections productivity at stores. Debtor costs as a
percentage of net debtors moved from 5.3% to 6.4%.

Mainly as a result of the previously unstable labour market, 
the level of satisfactory paid customers is 67.9% of total
debtors compared to 68.6% in the previous year, evidencing the 
continuing difficult credit environment. The impairment provision 
increased from 19.0% to 21.0%.

The continued strict centralised credit granting policies 
have been consistently applied during the period.
The credit application decline rate increased from 39%
to 41%. Credit sales remained within the
group's target range and accounted for 70% of sales
for the six month period (2014: 72.4%).

Store expansion

Lewis reached the 500 store mark following the
opening of nine new outlets during the period,
bringing the group's store base to 642 at the end
of September. The group now has 150 stores in the
smaller format with lower cost structures and higher
sales densities than the traditional stores.

Board of directors

During the period Zarina Bassa and Sizakele Marutlulle
resigned as independent non-executive directors.
Independent non-executive director, David Nurek,
was appointed to the audit committee to replace
Ms Bassa.

Update on Beares acquisition

Shareholders are advised that negotiations are
progressing with the business rescue practitioners 
with a view to concluding an sale agreement for
the acquisition of Beares from Ellerine Furnishers
Proprietary Limited ("Ellerines").

In terms of the proposed agreement, the group will
acquire the Beares brand and 63 of the existing
Beares stores in South Africa. The purchase
consideration is R40 million as well as stock to a
maximum value of R50 million. The acquisition is 
subject to various conditions precedent, including 
the approval of the competition authorities which is 
expected by 17 November 2014.

On completion of the transaction the Beares chain
will be integrated into the Lewis group's business model.
Management plans to retain the Beares brand and incorporate 
the My Home chain into the Beares business.

Beares is a scalable brand with exciting medium-
term expansion potential and will enable the group to
attract new customers in higher LSM markets where it
currently has limited exposure.

Prospects

New merchandise ranges have been launched in
stores and will be supported by strong marketing
campaigns ahead of the festive season.

Retail trading conditions are expected to remain
challenging over the remainder of the financial year,
however disruptive competitor activity is expected
to decline as stores are closed. Management will
continue to drive quality credit sales while containing
operating and debtor costs.

Despite the adverse trading conditions the group
continues to invest for growth and is on track to open
the targeted 20 Lewis outlets in the 2015 financial year.

The integration of the Beares business into the
Group's store, merchandise, supply chain and credit
operations will be one of management's priorities in
the months ahead.

Dividend declaration

Notice is hereby given that an interim gross cash
dividend of 215 cents per share in respect of the
6 months ended 30 September 2014 has been
declared payable to holders of ordinary shares.

The number of shares in issue as of the date of
declaration is 98 057 959.

The dividend has been declared out of income
reserves and is subject to a dividend tax of 15%.
The dividend for determining the dividend tax is
215 cents and the dividend tax payable is 32.25 cents
for shareholders who are not exempt. No STC credits
have been utilised. The net dividend for shareholders
who are not exempt will therefore be 182.75 cents.
The dividend tax rate may be reduced where the
shareholder is tax resident in a foreign jurisdiction
which has a Double Tax Convention with South Africa
and meets the requirements for a reduced rate.

The company's tax reference number is 9551/419/15/4.

The following dates are applicable to this declaration:

Last date to trade                                
"cum" dividend           Friday 16 January 2015   

Date trading commences                            
"ex" dividend            Monday 19 January 2015 
  
Record date              Friday 23 January 2015 
  
Date of payment          Monday 26 January 2015   


Share certificates may not be dematerialised or
rematerialised between Monday 19 January 2015 and
Friday 23 January 2015.

For and on behalf of the Board

David Nurek                   Johan Enslin
Independent                   Chief executive officer
non-executive chairman

Les Davies
Chief financial officer

Cape Town
10 November 2014

Income statement

                                       Six months               Six months     12 months
                                            ended                    ended         ended
                                     30 Sept 2014         %   30 Sept 2013   31 Mar 2014
                                        Unaudited    change      Unaudited       Audited
                               Notes           Rm                       Rm            Rm
Revenue                                   2 579.5      1.6%        2 538.9       5 281.7
Merchandise sales                         1 127.9                  1 169.2       2 409.1
Finance charges and
initiation fees earned                      640.7                    580.5       1 208.9
Insurance revenue                           442.8                    470.7         975.5
Ancillary services                          368.1                    318.5         688.2
Cost of merchandise sales                 (711.9)                  (728.6)     (1 524.4)
Operating costs                         (1 396.1)                (1 286.9)     (2 603.3)
Employment costs                          (420.9)                  (417.5)       (818.9)
Administration and IT                     (111.0)                  (109.4)       (217.1)
Debtor costs                        2     (400.9)                  (314.9)       (702.4)
Marketing                                  (94.8)                   (96.2)       (173.1)
Occupancy costs                           (127.7)                  (122.9)       (245.2)
Transport and travel                      (103.5)                   (93.4)       (192.6)
Depreciation                               (33.6)                   (31.9)        (58.5)
Other operating costs                     (103.7)                  (100.7)       (195.5)

Operating profit                            471.5    (9.9%)          523.4       1 154.0
Investment income                            62.5                     56.4         125.8
Profit before finance costs                 534.0                    579.8       1 279.8
Net finance costs                          (55.9)                   (46.1)       (102.7)
Interest paid                              (65.9)                   (53.5)       (116.8)
Interest received                             7.9                      2.4           6.5
Forward exchange contracts                    2.1                      5.0           7.6

Profit before taxation                      478.1                    533.7       1 177.1
Taxation                                  (137.9)                  (153.7)       (334.9)
Net profit attributable to
ordinary shareholders                       340.2   (10.5%)          380.0         842.2


Statement of comprehensive income

                                                    Six months       Six months       12 months
                                                         ended            ended           ended
                                                  30 Sept 2014     30 Sept 2013     31 Mar 2014
                                                     Unaudited        Unaudited         Audited
                                                            Rm               Rm              Rm
Net profit for the year                                  340.2            380.0           842.2
Movement in other reserves (recycled to
income statement on disposal)                             40.0             39.0            60.9
Fair value adjustment to available-for-sale
investments                                               50.7             41.0            71.5
Disposal of available-for-sale investments              (10.9)            (6.6)          (23.9)
Foreign currency translation reserve                       0.2              4.6            13.3

Retirement benefit remeasurements                            –                –            30.5
Other comprehensive income                                40.0             39.0            91.4
Total comprehensive income for the
period attributable to equity shareholders               380.2            419.0           933.6

Earnings and dividends per share

                                       Six months                 Six months      12 months
                                            ended                      ended          ended
                                     30 Sept 2014           %   30 Sept 2013    31 Mar 2014
                                        Unaudited      change      Unaudited        Audited
1. Weighted average no. of shares
   Weighted average                        88 817                     88 669         88 762
   Diluted weighted average                89 791                     89 141         89 614
2. Headline earnings (Rm)  
   Attributable earnings                    340.2                      380.0          842.2
   Profit on disposal of assets  
   and investments                         (10.1)                      (7.9)         (24.6)
   Headline earnings                        330.1     (11.3%)          372.1          817.6
3. Earnings per share (cents)  
   Earnings per share                       383.0     (10.6%)          428.6          948.8
   Diluted earnings per share               378.9                      426.3          939.8
4. Headline earnings per share  
   (cents)  
   Headline earnings per share              371.7                      419.7          921.1
   Diluted headline earnings  
   per share                                367.6                      417.4          912.4
5. Dividends per share (cents)  
   Dividends paid per share  
   Final dividend 2014 (2013)               302.0                      302.0          302.0
   Interim dividend 2014                        –                          –          215.0
                                            302.0                      302.0          517.0
   Dividends declared per share  
     Interim dividend 2015 (2014)           215.0                      215.0          215.0
     Final dividend 2014                        –                          –          302.0
                                            215.0                      215.0          517.0

Balance sheet

                                              30 Sept 2014   30 Sept 2013   31 Mar 2014
                                                 Unaudited      Unaudited       Audited
                                        Notes           Rm             Rm            Rm
Assets
Non-current assets
Property, plant and equipment                        329.2          331.3         327.3
Deferred taxation                                      0.5            0.5           0.6
Retirement benefit asset                              79.7           19.8          79.7
Insurance investments                       3      1 554.1        1 332.2       1 415.0
                                                   1 963.5        1 683.8       1 822.6
Current assets
Inventories                                          425.1          390.8         324.6
Trade and other receivables                 4      5 099.1        4 933.8       5 078.9
Taxation                                              37.5           31.3             –
Insurance investments                       3        160.1          347.6         283.7
Cash on hand and deposits                            268.2          164.7         480.1
                                                   5 990.0        5 868.2       6 167.3
Total assets                                       7 953.5        7 552.0       7 989.9
Equity and liabilities
Capital and reserves
Share capital and premium                            102.5          108.2         109.2
Other reserves                                       465.5          428.7         436.1
Retained earnings                                  4 870.2        4 481.2       4 796.5
                                                   5 438.2        5 018.1       5 341.8
Non-current liabilities
Long-term interest-bearing
borrowings                                         1 075.0          950.0       1 000.0
Deferred taxation                                    173.3          152.6         173.5
Retirement benefit liability                          99.1           81.3          92.9
                                                   1 347.4        1 183.9       1 266.4
Current liabilities
Trade and other payables                             286.5          290.7         227.9
Reinsurance and insurance liabilities                379.8          445.9         388.7
Taxation                                                 –              –           7.1
Short-term interest-bearing
borrowings                                           501.6          613.4         758.0
                                                   1 167.9        1 350.0       1 381.7
Total equity and liabilities                       7 953.5        7 552.0       7 989.9

Statement of changes in equity

                                        Six months       Six months      12 months
                                             ended            ended          ended
                                      30 Sept 2014     30 Sept 2013    31 Mar 2014
                                         Unaudited        Unaudited        Audited
                                                Rm               Rm             Rm
Share capital and premium
Opening balance                              109.2             88.4           88.4
Cost of own shares acquired
(treasury shares)                           (26.6)                –         (10.7)
Share awards to employees                     19.9             19.8           31.5
                                             102.5            108.2          109.2
Other reserves
Opening balance                              436.1            397.8          397.8
Other comprehensive income
for the year                                  40.0             39.0           60.9
Share-based payment                           11.0             16.0           27.0
Transfers to retained earnings              (21.6)           (24.1)         (49.6)
                                             465.5            428.7          436.1
Retained earnings
Opening balance                            4 796.5          4 361.1        4 361.1
Net profit attributable to ordinary
shareholders                                 340.2            380.0          842.2
Distribution to shareholders               (268.2)          (268.2)        (459.3)
Share awards to employees                   (19.9)           (16.4)         (28.1)
Transfers from other reserves                 21.6             24.1           49.6
Profit on sale of own shares                     –              0.6            0.5
Retirement benefit remeasurements                –                –           30.5
                                           4 870.2          4 481.2        4 796.5
Balance at the end of period               5 438.2          5 018.1        5 341.8

Cash flow statement

                                                Six months      Six months      12 months
                                                     ended           ended          ended
                                              30 Sept 2014    30 Sept 2013    31 Mar 2014
                                                 Unaudited       Unaudited        Audited
                                                        Rm              Rm             Rm
CASH FLOW FROM OPERATING ACTIVITIES
Cash flow from trading                               729.6           723.0        1 360.2
Change in working capital                          (278.8)         (264.9)        (429.3)
Cash generated from operations                       450.8           458.1          930.9
Interest and dividends received                       57.8            50.7          104.1
Interest paid                                       (63.8)          (48.5)        (109.2)
Taxation paid                                      (191.6)         (192.1)        (326.9)
                                                     253.2           268.2          598.9
CASH FLOW FROM INVESTING ACTIVITIES
Net disposals to insurance investments                45.9            72.2           87.6
Acquisition of property, plant and equipment        (38.9)          (40.5)         (59.1)
Proceeds on disposal of property, plant
and equipment                                          4.1            11.6            6.8
                                                      11.1            43.3           35.3
CASH FLOW FROM FINANCING ACTIVITIES
Dividends paid                                     (268.2)         (268.2)        (459.3)
Increase/(Decrease) in long-term borrowings           75.0         (300.0)        (250.0)
(Decrease)/Increase in short-term borrowings       (300.0)           300.0          650.0
Proceeds on sale of own shares                           –             4.0            3.9
Purchase of own shares                              (26.6)               –         (10.7)
                                                   (519.8)         (264.2)         (66.1)
Net (decrease)/increase in cash
and cash equivalents                               (255.5)            47.3          568.1
Cash and cash equivalents at the
beginning of the period                              472.1          (96.0)         (96.0)
Cash and cash equivalents at the end
of the period                                        216.6          (48.7)          472.1
ANALYSIS OF BORROWINGS AND FACILITIES
Borrowings
  Long-term                                        1 075.0           950.0        1 000.0
  Short-term                                         450.0           400.0          750.0
                                                   1 525.0         1 350.0        1 750.0
Cash and cash equivalents
  Short-term facilities utilised                      51.6           213.4            8.0
  Cash on hand                                     (268.2)         (164.7)        (480.1)
                                                   (216.6)            48.7        (472.1)
Net borrowings                                     1 308.4         1 398.7        1 277.9
Unutilised facilities:
  Banking facilities                               1 016.6           751.3        1 272.1
  Domestic Medium-Term Note Programme              1 700.0               –        1 500.0
Banking facilities and Domestic
Medium-Term Note Programme                         4 025.0         2 150.0        4 050.0

Segmental report

Reportable segment                     Best Home
                             Lewis  and Electric    My Home      Group
                                Rm            Rm         Rm         Rm
For the six months ended
30 September 2014
(unaudited)
Revenue                    2 142.6         372.3       64.6    2 579.5
Operating profit             395.0          70.2        6.3      471.5
Operating margin             18.4%         18.9%       9.8%      18.3%
Segment assets             4 549.9         709.6      134.6    5 394.1
For the six months ended
30 September 2013
(unaudited)
Revenue                    2 115.5         362.3       61.1    2 538.9
Operating profit             441.3          75.3        6.8      523.4
Operating margin             20.9%         20.8%      11.0%      20.6%
Segment assets             4 361.0         702.8      131.3    5 195.1
For the 12 months ended 
31 March 2014 (audited) 
Revenue                    4 400.0         755.6      126.1    5 281.7
Operating profit             962.8         175.9       15.3    1 154.0
Operating margin             21.9%         23.3%      12.1%      21.8%
Segment assets             4 421.1         715.3      128.8    5 265.2

Notes to the financial statements

1.   Basis of reporting
     The group's interim financial statements have been prepared in accordance with the
     recognition and measurement principles of International Financial Reporting Standards
     (IFRS) including IAS 34 (Interim Financial Reporting), and in compliance with the Listings
     Requirements of the JSE. The accounting policies are consistent with those applied in the
     annual financial statements for the year ended 31 March 2014.

                                                   Six months         Six months         12 months
                                                        ended              ended             ended
                                                 30 Sept 2014       30 Sept 2013       31 Mar 2014
                                                    Unaudited          Unaudited           Audited
                                                           Rm                 Rm                Rm
2.   Debtor costs
     Bad debts, repossession losses
     and bad debt recoveries                            209.3              184.2             570.1
     Movement in impairment provision                   191.6              130.7             132.3
                                                        400.9              314.9             702.4


3.   Insurance investments –
     available-for-sale
     Listed
         Listed shares                                  733.4              636.3             701.9
         Fixed income securities                        820.7              695.9             713.1
     Unlisted
         Money market                                   160.1              347.6             283.7
                                                      1 714.2            1 679.8           1 698.7

     Investments are classified as available-for-sale and reflected at fair value. Changes in fair
     value are reflected in the statement of comprehensive income.

     In terms of the fair value hierarchy set out in IFRS 13, listed and unlisted investments are
     categorised as Level 1 and Level 2 respectively.

4.   Trade and other receivables
     Instalment sale and loan receivables             7 505.0            7 195.0           7 314.4
     Provision for unearned maintenance
     income                                           (212.4)            (219.4)           (211.0)
     Provision for unearned initiation fees
     and unearned finance charges                     (227.9)            (219.2)           (230.6)
     Provision for unearned insurance
     premiums                                         (774.6)            (824.3)           (802.7)
     Net instalment sale and loan receivables         6 290.1            5 932.1           6 070.1
     Provision for impairment                       (1 321.1)          (1 127.8)         (1 129.5)
                                                      4 969.0            4 804.3           4 940.6
     Other receivables                                  130.1              129.5             138.3
                                                      5 099.1            4 933.8           5 078.9

     Amounts due from instalment sale and loan receivables after one year are reflected as
     current, as they form part of the normal operating cycle. The credit terms of instalment sale
     and loan receivables range from 6 to 36 months.

     The average effective interest rate on instalment sale and loan receivables is 21.4%
     (2014: 21.3%) and the average term of the sale is 32.1 months (2014: 32.6 months).

Debtors' analysis

The company assesses each customer individually on a monthly basis and categorises customers
into 13 payment categories. This assessment is integral to the calculation of the debtors'
impairment provision and incorporates both payment behaviour and the age of the account.
The 13 payment categories have been summarised into four main groupings of customers.
An analysis of the debtors book based on the payment ratings is set out below.

                                                                       Distribution of
                                        No. of customers             impairment provision
                                          Sept      Sept            Sept      Sept     March
                                          2014      2013            2014      2013      2014
Satisfactory paid                No.   462 625   474 253   Rm       22.6      28.2      22.9
Customers fully up to date        %      67.9%     68.6%    %       1.7%      2.5%      2.0%
including those who have
paid 70% or more of amounts
due over the contract period.
The provision in this category
results from the in
duplum rule.
Slow payers                      No.    53 912    54 771   Rm      127.7     113.3     121.3
Customers who have paid           %       7.9%      7.9%    %       9.7%     10.0%     10.8%
65% to 70% of amounts due
over the contract period. The
provision in this category
ranges from 11% to 74% of
amounts due and includes an
in duplum provision ( 2014:
11% to 78%)
Non-performing customers         No.    49 971    53 021   Rm      189.3     183.2     180.0
Customers who have paid           %       7.3%      7.7%    %      14.3%     16.3%     15.9%
55% to 65% of amounts due
over the contract period. The
provision in this category
ranges from 22% to 85% of
amounts due (2014: 20%
to 90%)
Non-performing customers         No.   115 220   109 431   Rm      981.5     803.1     805.3
Customers who have paid           %      16.9%     15.8%    %      74.3%     71.2%     71.3%
55% or less of amounts due
over the contract period. The
provision in this category
ranges from 27% to 100%
of amounts due (2014: 28%
to 100%)

Total                            No.   681 728    691 476   Rm   1 321.1   1 127.8   1 129.5

Debtors impairment as a % of net debtors                           21.0%     19.0%     18.6%

Key ratios
                                                   Six months     Six months     12 months
                                                        ended          ended         ended
                                                 30 Sept 2014   30 Sept 2013   31 Mar 2014
Operating efficiency ratios
Gross profit margin (%)                                 36.9%          37.7%         36.7%
Operating profit margin (%)                             18.3%          20.6%         21.8%
Number of stores                                          642            627           636
Number of permanent employees (average)                 7 534          7 598         7 590
Trading space (sqm)                                   214 027        223 501       221 336
Inventory turn                                            3.5            3.9           4.7
Current ratio                                             5.1            4.3           4.5
Credit ratios
Credit sales (%)                                        69.7%          72.4%         72.3%
Debtor costs as a % of the net debtors                   6.4%           5.3%         11.6%
Debtors' impairment provision as a
% of net debtors                                        21.0%          19.0%         18.6%
Arrear instalments on satisfactory accounts as a
percentage of net debtors                                8.6%           8.4%          8.6%
Arrear instalments on slow-paying and non-
performing accounts as a percentage of net
debtors                                                 25.0%          23.1%         22.6%
Credit applications decline rate                        41.0%          39.0%         38.4%
Shareholder ratios
Net asset value per share (cents)                       6 130          5 650         6 012
Gearing ratio                                           24.1%          27.9%         23.9%
Dividend payout ratio                                   62.0%          55.5%         60.2%
Return on average equity (after-tax)                    12.6%          15.4%         16.5%
Return on average capital employed
(after-tax)                                             10.8%          12.8%         13.6%
Return on average assets managed (pre-tax)              13.4%          15.6%         16.8%

Notes:
1. All ratios are based on figures at the end of the period unless otherwise disclosed
2. The net asset value has been calculated using 88 715 000 shares in issue (2014: 88 811 000).
3. Total assets exclude the deferred tax asset.  

Executive directors: J Enslin (Chief executive officer), LA Davies (Chief financial officer). 
Independent non-executive directors: DM Nurek (Chairman), H Saven, BJ van der Ross, Professor F Abrahams, AJ Smart.
Company secretary: MG McConnell. Transfer secretaries: Computershare Investor Services (Pty) Ltd; 
70 Marshall Street, Johannesburg, 2001; PO Box 61051, Marshalltown, 2107.

Auditors: PricewaterhouseCoopers Inc. Sponsor: UBS South Africa (Pty) Ltd. 
Registered office: 53A Victoria Road, Woodstock, 7925. Registration number: 2004/009817/06.
Share code: LEW. ISIN: ZAE000058236 Bond code: LEW01 Bond ISIN No. ZAG000110222

These results are also available on our website: www.lewisgroup.co.za
Date: 10/11/2014 07:05:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE'). 
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