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LEWIS GROUP LIMITED - LEW01 - Lewis Group Credit Ratings and Outlook Affirmed

Release Date: 05/09/2016 16:00
Code(s): LEW01     PDF:  
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LEW01 - Lewis Group Credit Ratings and Outlook Affirmed

Lewis Group Limited
Incorporated in the Republic of South Africa
Registration No. 2004/009817/06
Bond Code: 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 5 September 2016.

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 ratings to Lewis Group Limited (“Lewis”) based
on the following key criteria:

The ratings take cognisance of Lewis’ market position as a leading domestic household goods credit
retailer to the lower income market, supported by its significant store network from the large urban
areas to small rural towns. The group’s growing geographic footprint outside of South Africa is also
positively considered. Nonetheless, changes to domestic credit laws, exacerbated by a high degree of
consumer financial strain (being particularly pronounced in Lewis’ core target segment), has restricted
the group’s revenue growth of late. Overall, group revenue rose by a mere 2% to R5.8bn in F16, on
the back of the Beares chain acquisition concluded in late F15.

Favourable shifts in product mix, particularly in the second half, drove a strengthening in the gross
margin for the year, although once-off expenses to integrate Beares, as well as higher debtors costs
saw the operating margin shrink for the third consecutive year to a review period low of 14% in F16
(F15: 19%). Whilst competitive pressures have eased, the weak economic outlook and tighter
regulations on credit sales will continue to weigh on short term prospects, with forecasts for F17
revised downwards (or to remain flat). Medium to longer term margin support could stem from
synergies from Beares and the enlarged Africa portfolio once the assets are fully bedded down.
Cognisance is taken of pending legal disputes which could have potential negative financial and
longer-term reputational ramifications.

Lewis’ consumer credit operations finance broadly two third of sales. The gross receivables portfolio
grew by a moderate 4% to total R6.5bn at FYE16, whilst impairments and bad debts grew by a
significantly faster 18% and 10% respectively, indicating the challenging consumer lending
environment. While the cyclical deterioration in asset-quality metrics is expected to persist, such risks
are likely to remain manageable for Lewis in view of its strengthened credit controls.

Lewis continues to reflect a conservative financial risk profile, despite the uptick in debt levels to fund
recent acquisitions. Specifically, net gearing was moderate at 26% at FYE16, while net debt to
EBITDA remained low at around 1.5x. Despite tempered earnings growth, continued strong cash
generation is expected to be sufficient to fund Lewis’ operational and moderate capex requirements in
F17, with any excess to be used to pay down borrowings. Liquidity is also supported by a comfortable
debt maturity profile and sizeable committed facilities.

Upward rating movement would be considered if the group successfully integrates the new
acquisitions that lead to sustained improvement in trading and margins over the medium term.
Furthermore, upside potential would only likely materialise on the back of notable improvements in the
operating environment, and in particular consumer health. Downside rating pressure could arise if
economic conditions and emerging regulatory risks caused operating performance to deteriorate
significantly beyond expectations. Further, any material adverse findings in respect of the legal
disputes could potentially affect the ratings.”

Cape Town
5 September 2016

Debt Sponsor
Absa Bank Limited (acting through its Corporate and Investment Bank division)

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