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LEWIS GROUP LIMITED - Lewis Group Credit Ratings And Outlook Affirmed

Release Date: 24/08/2015 10:45
Code(s): LEW     PDF:  
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Lewis Group Credit Ratings And Outlook Affirmed

Lewis Group Limited
Incorporated in the Republic of South Africa
Reg No. 2004/009817/06
JSE Share Code: LEW
ISIN: ZAE000058236
LEW01 ISIN: ZAG000110222
(“Lewis Group”or “Lewis”)


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 24 August 2015.


The ratings are as follows:
National long-term rating: ‘A(za)’
National short-term rating: ‘A1(za)’
Outlook: Stable


The announcement released by GCR follows:


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

Lewis reported muted revenue growth and stagnant operating income in F15, with the operating margin
falling from 24.2% in F13 to 20% in F15 (F14: 21.8%). This was in part a function of the compression in the
gross margin that was witnessed in F14 and F15, which in turn resulted from the impact of the weaker
domestic currency on imported goods and the group’s limited pricing power in a competitive market.
However, much of the margin compression emanated from higher debtor charges, which rose 22% to
R858m in F15 (consisting of a R165m increase in impairment provisions and R693m in write-offs).
Lewis’ debtors book has reported some deterioration over the past two years, but remains in adequate
condition overall. In this respect, a stable 68.7% of debtors were classified as “satisfactory paid” at FYE15,
while impairment provisions increased to R1.3bn against a R6.6bn gross book excluding unearned income
(FYE14: provision of R1.1bn versus a R6.1bn gross book). Notably, write-offs in any one year have never
exceeded the total level of provisioning reported at the end of the prior year.
Notwithstanding the generally depressed domestic economy, the demise of Ellerines has significantly
eased competitive pressures in the domestic market, and this enabled Lewis to acquire the Beares brand
and its 61-store network in December 2014. This acquisition (costing R66.6m) has provided the group with
critical mass in the higher-income market segment, and Lewis has taken the opportunity to consolidate the
My Home brand into Beares.
The group continued to report sound credit protection metrics at FYE15, with net gearing relatively
unchanged at 24% and net debt to EBITDA only slightly higher at 112% (FYE14: 105%). Furthermore,
operating cash flow coverage of gross debt remained sound at 32% at FYE15 (FYE14: 34%), as did net
interest cover at 9.3x in F15 (F14: 10.5x).
Lewis has been the subject of negative scrutiny from the press and from certain regulators, culminating in
its referral to the National Consumer Tribunal (“NCT”). GCR has considered the potential negative
financial and reputational ramifications thereof, as well as management’s response to the NCT. This
response indicated that Lewis is largely disputing the referral, apart from certain loss of employment
insurance contracts that were sold to pensioners and self-employed individuals. Specifically, premiums
of R46m and accrued interest of R23m will be repaid to affected customers, with such premiums
pertaining to an eight-year period. Accordingly, GCR is of the view that, apart from potential fines, the
NCT inquiry is not likely to materially impact the financial wellbeing or future business volumes of Lewis.
More concerning is the potential cap on credit life insurance premiums to R4 per R1,000 insured, as
compared to the R8.75 per R1,000 that is currently charged by Lewis. Management has indicated that, in a
worst case scenario, this could affect NPAT by 12%-15%. That said, the cap on credit life fees has been
touted for several years, and the industry continues to await feedback from the relevant regulators. GCR will
continue to monitor regulatory developments closely.


The domestic operating environment remains challenging, with low economic growth compounding
structural unemployment and a highly-indebted/generally-embattled consumer base. While Lewis’ results
have been resilient in comparison to its peers, these conditions are expected to prevail over the medium
term.
Looking ahead, upward rating migration is only likely over the medium to long term, and would require an
improvement in domestic economic conditions, and in particular consumer health. Conversely, material
adverse findings in respect of the NCT inquiry into Lewis and/or changes in the regulatory environment
that adversely impact finance and/or insurance income could affect the ratings. Additionally, significant
deterioration in the performance of Lewis’ receivables book would negatively impact its credit risk profile,
and could warrant negative ratings action”.

Cape Town
24 August 2015
Sponsor: UBS South Africa (Pty) Ltd




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