To view the PDF file, sign up for a MySharenet subscription.

LEWIS GROUP LIMITED - Unaudited Interim Results for the six months ended 30 September 2016

Release Date: 09/11/2016 07:05
Code(s): LEW     PDF:  
Wrap Text
Unaudited Interim Results for the six months ended 30 September 2016

LEWIS GROUP LTD
Registration number: 2004/009817/06.
Share code: LEW. 
ISIN: ZAE000058236 

UNAUDITED INTERIM RESULTS   
for the six months ended 30 September 2016

GROSS MARGIN EXPANDED TO 40.5%
OPERATING MARGIN DOWN TO 10%
HEADLINE EARNINGS PER SHARE 39.6%LOWER
INTERIM DIVIDEND 100c PER SHARE

TRADING AND FINANCIAL PERFORMANCE

The challenging economic and consumer environment in the country,
coupled with the ongoing impact of the National Credit Regulator's
affordability assessment regulations, has severely impacted the group's
merchandise sales and in particular credit sales over the past six months.

The affordability regulations require customers to provide their three
latest salary advices or bank statements as part of the credit approval
process. This is proving a major challenge for many consumers in the
group's lower- to middle-income target market who are self-employed
or work in the informal sector, restricting their access to credit.

Merchandise sales increased by 1% while like for like store merchandise
sales declined by 9.2%. Revenue for the six months declined by 2% to
R2.7 billion. This was mainly as a result of a 4% drop in other revenue,
where insurance revenue and services rendered declined by 8% owing to
the lower credit sales. Group credit sales declined by 2.3% (like for like
credit sales 11% down) and accounted for 63.4% (2015: 65.9%) of total
sales. Credit sales in Beares account for 52.9% of it's total sales while
in Lewis and Best Home and Electric 67.4% of their sales are on credit.

The gross profit margin strengthened by 410 basis points to 40.5%
benefiting from the change in the product mix where the higher margin
furniture category increased to 58.3% of total sales as opposed to 54.7%
in the comparable period. Improved pricing on new product ranges
and competitively priced merchandise sourced from local suppliers
also supported the margin.

Operating costs, excluding debtor costs, increased by 8.4% mainly as
a result of the integration costs of the 56 Beares and Ellerines stores
acquired in Botswana, Lesotho, Namibia and Swaziland. Excluding
Beares, operating costs across Lewis and Best Home & Electric were well
managed to an increase of 2.9%. Beares has a higher cost structure than
the group's other brands and it is expected to take another two years to
more closely align the Beares expense base with the rest of the group.

The group's operating margin was impacted by slower revenue growth,
the Beares integration costs and higher debtor costs, and contracted
to 10.0% (H1 2016: 14.7%). Headline earnings declined from R287 million
to R173 million with headline earnings per share 39.6% lower and
earnings per share 41.4% lower than the corresponding prior period.
These results are in line with the group's trading statement released
on SENS on 21 October 2016.

DEBTOR MANAGEMENT

Debtor cost growth slowed to 7.3% for the period. Debtor costs as a
percentage of net debtors increased from 8.1% to 8.6% owing to higher
bad debt levels. The level of satisfactory paid customers at 67.9% is
similar to last year's 68.1% despite the deteriorating consumer 
credit environment.

STORE EXPANSION

The portfolio of 56 Ellerines and Beares stores acquired in Botswana
(20 stores), Lesotho (10 stores), Namibia (21 stores) and Swaziland
(5 stores) have been successfully integrated into the group's operations.
The group now has 118 stores outside of South Africa, accounting for
15% of the total store base.

At the end of September the group traded out of 780 outlets. The group
is consolidating its store base in smaller towns which can no longer
support multiple stores and where competitors have closed stores
and expects a net reduction of 10 stores during half two, resulting in
770 outlets trading by the end of the financial year.

PROSPECTS

Trading conditions are not expected to improve over the remainder
of the financial year as consumers face increasing pressures on
disposable income.

The directors are positive about the group's medium- to longer-term
prospects and the business remains cash generative with low levels
of gearing at 18.8% (H1 2016: 27.6%), reflecting the strength of the
balance sheet.

The newly acquired stores in the rest of Africa are showing encouraging
sales performance and are expected to make a solid contribution to
the group's revenue and profitability in the medium term.

INTERIM DIVIDEND DECLARATION

The board has decided to declare an interim dividend of 100
cents per share which represents a 55% payout of the net profit
attributable to ordinary shareholders.

Notice is hereby given that an interim gross cash dividend of 100 cents
per share in respect of the period ended 30 September 2016 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 100 cents
and the dividend tax payable is 15 cents for shareholders who are not
exempt. The net dividend for shareholders who are not exempt will
therefore be 85 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 of trade "cum" dividend              Tuesday 17 January 2017
Date of trading commences "ex" dividend      Wednesday 18 January 2017
Record date                                     Friday 20 January 2017
Date of payment                                 Monday 23 January 2017

Share certificates may not be dematerialised or rematerialised between
Wednesday 18 January 2017 and Friday 20 January 2017, both days
inclusive.

For and on behalf of the Board

David Nurek              Johan Enslin              Les Davies
Independent              Chief executive officer   Chief financial officer
Non-executive chairman

Cape Town

9 November 2016

INCOME STATEMENT
                                                       6 months                6 months       12 months
                                                          ended                   ended           ended
                                                        30 Sept                 30 Sept        31 March
                                                           2016                    2015            2016
                                                      Unaudited    Change     Unaudited         Audited
                                             Notes           Rm         %            Rm              Rm
Revenue                                                 2 745.8     (1.9)       2 797.8         5 785.0
Merchandise sales                                       1 233.0                 1 226.8         2 667.7
Finance charges and initiation fees earned                731.9                   722.3         1 426.3
Insurance revenue                                         420.3                   456.6           908.2
Gross earned insurance premiums                           318.1                   445.9           896.8
Reinsurance commission                                    106.4                   134.8           256.7
Reinsurance premiums                                      (4.2)                 (124.1)         (245.3)
Ancillary services                                        360.6                   392.1           782.8
Cost of merchandise sales                               (733.9)                 (780.6)       (1 652.8)
Operating costs                                       (1 736.9)               (1 607.0)       (3 317.2)
Employment costs                                        (498.0)                 (475.5)         (946.3)
Administration and IT                                   (156.5)                 (127.1)         (274.5)
Debtor costs                                     2      (502.1)                 (468.1)       (1 005.1)
Marketing                                               (112.9)                 (103.4)         (192.4)
Occupancy costs                                         (183.1)                 (160.3)         (329.1)
Transport and travel                                    (101.7)                 (110.4)         (224.2)
Depreciation and amortisation                            (48.5)                  (45.1)          (85.6)
Other operating costs                                   (134.1)                 (117.1)         (260.0)
Operating profit before investment income                 275.0    (33.0)         410.2           815.0
Investment income                                3         58.0                    67.3           600.6
Profit before finance costs                               333.0                   477.5         1 415.6
Net finance costs                                        (80.5)                  (60.2)         (136.1)
Interest paid                                            (96.9)                  (71.7)         (158.4)
Interest received                                          25.9                     6.2            14.0
Forward exchange contracts                                (9.5)                     5.3             8.3
Profit before taxation                                    252.5                   417.3         1 279.5
Taxation                                         8       (78.2)                 (119.3)         (318.0)
Net profit attributable to ordinary shareholders          174.3    (41.5)         298.0           961.5

STATEMENT OF COMPREHENSIVE INCOME
                                                       6 months                6 months       12 months
                                                          ended                   ended           ended
                                                        30 Sept                 30 Sept        31 March
                                                           2016                    2015            2016
                                                      Unaudited     Change    Unaudited         Audited
                                                             Rm          %           Rm              Rm
Net profit for the year                                   174.3                   298.0           961.5
Items that may be subsequently reclassified  
to income statement:  
                                                            2.3                  (29.8)         (456.7)
Fair value adjustment to  
available-for-sale investments                             13.3                  (50.4)          (71.2)
Disposal of available-for-sale investments                    -                    10.2         (406.3)
Foreign currency translation reserve                     (11.0)                    10.4            20.8
Items that may not be subsequently  
reclassified to income statement:  
Retirement benefit remeasurements                             -                       -           (2.3)
Other comprehensive income                                  2.3                  (29.8)         (459.0)
Total comprehensive income for the period  
attributable to equity shareholders                       176.6                   268.2           502.5

 EARNINGS AND DIVIDENDS PER SHARE
                                                6 months                 6 months             12 months
                                                   ended                    ended                 ended
                                                 30 Sept                  30 Sept              31 March
                                                    2016                     2015                  2016
                                               Unaudited     Change     Unaudited               Audited
                                                      Rm          %            Rm                    Rm
1. Weighted average number of shares ('000)        
   Weighted average                               88 671                   88 829                88 811
   Diluted weighted average                       88 776                   89 160                89 532
2. Headline earnings (Rm)        
   Attributable earnings                           174.3                    298.0                 961.5
   Profit on disposal of property, plant and        
   equipment                                       (0.4)                    (1.2)                 (2.7)
   Profit on disposal of available-for-sale        
   investments                                         -                   (10.2)               (406.3)
   Gain on acquisition of Beares                   (1.2)                        -                 (0.4)
   Headline earnings                               172.7     (39.7)         286.6                 552.1
3. Earnings per share (cents)          
   Earnings per share                              196.6     (41.4)         335.5               1 082.6
   Diluted earnings per share                      196.3                    334.2               1 073.9
4. Headline earnings per share (cents)          
   Headline earnings per share                     194.8     (39.6)         322.6                 621.7
   Diluted headline earnings per share             194.5                    321.4                 616.7
5. Dividends per share (cents)        
   Dividends paid per share         
   Final dividend 2016 (2015)                      302.0                    302.0                 302.0
   Interim dividend 2017 (2016)                        -                        -                 215.0
                                                   302.0                    302.0                 517.0
   Dividends declared per share        
   Interim dividend 2017 (2016)                    100.0                    215.0                 215.0
   Final dividend 2017                                 -                        -                 302.0
                                                   100.0                    215.0                 517.0

BALANCE SHEET
                                                                         30 Sept     30 Sept   31 March
                                                                            2016        2015       2016
                                                                       Unaudited   Unaudited    Audited
                                                               Notes          Rm          Rm         Rm
Assets                    
Non-current assets                    
Property, plant and equipment                                              362.5       362.1      370.4
Goodwill                                                                     8.9           -          -
Trademarks                                                                  68.3        58.6       61.4
Deferred taxation                                                           61.5         0.8       85.7
Retirement benefit asset                                                    63.0        77.4       63.0
Financial assets - insurance investments                           4       449.9     1 707.4      432.0
                                                                         1 014.1     2 206.3    1 012.5
Current assets                    
Inventories                                                                449.6       518.7      444.5
Trade and other receivables                                        5     4 472.3     4 397.5    4 514.3
Reinsurance assets                                                 6       269.8       435.7      397.3
Insurance premiums in advance                                              739.1     1 317.4    1 185.4
Taxation                                                                   206.4        96.5       28.3
Financial assets - insurance investments                           4       818.1       106.2    1 236.5
Cash on hand and deposits                                                  836.3       247.4      587.2
                                                                         7 791.6     7 119.4    8 393.5
Total assets                                                             8 805.7     9 325.7    9 406.0
Equity and liabilities                    
Capital and reserves                    
Share capital and premium                                                  108.0       107.5       92.1
Other reserves                                                              20.0       454.8       27.5
Retained earnings                                                        5 235.0     4 858.9    5 329.8
                                                                         5 363.0     5 421.2    5 449.4
Non-current liabilities                    
Long-term interest-bearing borrowings                                    1 100.0     1 025.0    1 375.0
Deferred taxation                                                           69.3        67.0       60.8
Retirement benefit liability                                               107.7       108.1      100.2
                                                                         1 277.0     1 200.1    1 536.0
Current liabilities                    
Trade and other payables                                                   376.7       275.6      270.2
Reinsurance and insurance liabilities                              6     1 044.9     1 707.8    1 550.4
Short-term interest-bearing borrowings                                     744.1       721.0      600.0
                                                                         2 165.7     2 704.4    2 420.6
Total equity and liabilities                                             8 805.7     9 325.7    9 406.0

CASH FLOW STATEMENT
                                                                 6 months       6 months      12 months
                                                                    ended          ended          ended
                                                                  30 Sept        30 Sept       31 March
                                                                     2016           2015           2016
                                                                Unaudited      Unaudited        Audited
                                                        Note           Rm             Rm             Rm
Cash flow from operating activities
Cash flow from trading                                              352.8          669.2        1 104.7
Change in working capital                                           274.8        (238.0)        (154.3)
Cash generated from operations                                      627.6          431.2          950.4
Interest received                                                    83.9           45.6           99.3
Dividends received                                                      -           15.4           19.7
Interest paid                                                     (106.4)         (66.4)        (150.1)
Taxation paid                                                     (230.4)        (203.8)        (330.3)
                                                                    374.7          222.0          589.0
Cash flow from investing activities
Net disposals/(acquisition) of insurance
investments                                                         419.0         (11.6)           79.6
Purchase of insurance investments                               (1 992.1)         (63.5)      (1 574.8)
Disposal of insurance investments                                 2 411.1           51.9        1 654.4
Acquisition of property, plant and equipment                       (38.3)         (58.0)        (104.3)
Purchase of businesses                                     7      (111.0)              -        (101.1)
Proceeds on disposal of property, plant and equipment                 3.7            6.9           12.7
                                                                    273.4         (62.7)        (113.1)
Cash flow from financing activities
Dividends paid                                                    (268.1)        (268.0)        (459.0)
Proceeds from borrowings                                                -          150.0        1 150.0
Repayments of borrowings                                          (150.0)              -        (700.0)
Purchase of own shares                                                  -         (38.2)         (53.0)
                                                                  (418.1)        (156.2)         (62.0)
Net increase in cash and cash equivalents                           230.0            3.1          413.9
Cash and cash equivalents at the beginning of the period            587.2          173.3          173.3
Cash and cash equivalents at the end of the period                  817.2          176.4          587.2
Analysis of borrowings and facilities
Borrowings
Long-term                                                         1 100.0        1 025.0        1 375.0
Short-term                                                          725.0          650.0          600.0
                                                                  1 825.0        1 675.0        1 975.0
Cash and cash equivalents 
Short-term facilities utilised                                       19.1           71.0              -
Cash on hand                                                      (836.3)        (247.4)        (587.2)
                                                                  (817.2)        (176.4)        (587.2)
Net borrowings                                                    1 007.8        1 498.6        1 387.8
Unutilised facilities: 
  Banking facilities                                              1 567.2          926.4        1 337.2
  Domestic Medium-Term Note Programme                             1 700.0        1 700.0        1 700.0
Banking facilities and Domestic Medium-Term Note Programme        4 275.0        4 125.0        4 425.0

STATEMENT OF CHANGES IN EQUITY
                                                                 6 months       6 months      12 months
                                                                    ended          ended          ended
                                                                  30 Sept        30 Sept       31 March
                                                                     2016           2015           2016
                                                                Unaudited      Unaudited        Audited
                                                                       Rm             Rm             Rm
Share capital and premium             
Opening balance                                                      92.1          110.8          110.8
Cost of own shares acquired (treasury shares)                           -         (38.2)         (53.0)
Share awards to employees                                            15.9           34.9           34.3
                                                                    108.0          107.5           92.1
Other reserves             
Opening balance                                                      27.5          492.4          492.4
Other comprehensive income for the year             
(refer statement of comprehensive income)                             2.3         (29.8)        (456.7)
Share-based payment                                                   5.1           10.6           10.3
Transfers to retained earnings                                     (14.9)         (18.4)         (18.5)
                                                                     20.0          454.8           27.5
Retained earnings             
Opening balance                                                   5 329.8        4 845.4        4 845.4
Net profit attributable to ordinary shareholders                    174.3          298.0          961.5
Distribution to shareholders                                      (268.1)        (268.0)        (459.0)
Transfers from other reserves                                        14.9           18.4           18.5
Share awards to employees                                          (15.9)         (34.9)         (34.3)
Retirement benefit remeasurements                                       -              -          (2.3)
                                                                  5 235.0        4 858.9        5 329.8
Balance at the end of period                                      5 363.0        5 421.2        5 449.4

SEGMENTAL REPORT
                                                                        Best Home
                                                              Lewis  and Electric    Beares       Group
Reportable segment                                               Rm            Rm        Rm          Rm
For the six months ended                          
30 September 2016 (unaudited)                          
Revenue                                                     2 046.8         353.6     345.4     2 745.8
Segment operating profit before                           
investment income                                             217.8          55.2       2.0       275.0
Operating margin                                              10.6%         15.6%      0.6%       10.0%
Segment assets                                              3 571.4         605.8     474.2     4 651.4
For the six months ended                          
30 September 2015 ( unaudited)                          
Revenue                                                     2 226.2         382.1     189.5     2 797.8
Segment operating profit before                          
investment income                                             362.1          70.7    (22.6)       410.2
Operating margin                                              16.3%         18.5%   (11.9%)       14.7%
Segment assets                                              3 841.0         641.2     308.1     4 790.3
For the twelve months ended                          
31 March 2016 (audited)                          
Revenue                                                     4 564.7         793.3     427.0     5 785.0
Segment operating profit before                          
investment income                                             700.4         143.0    (28.4)       815.0
Operating margin                                              15.3%         18.0%    (6.7%)       14.1%
Segment assets                                              3 759.8         624.1     403.3     4 787.2

NOTES TO THE FINANCIAL STATEMENTS

1.   Basis of reporting
     The condensed consolidated interim financial statements are prepared in accordance with International
     Financial Reporting Standard, IAS 34: Interim Financial Reporting, the SAICA Financial Reporting Guides
     as issued by the Accounting Practices Committee and Financial Pronouncements as issued by the Financial
     Reporting Standards Council and the requirements of the Companies Act of South Africa. The accounting
     policies applied in the preparation of these interim financial statements are in terms of International 
     Financial Reporting Standards and consistent with those applied in the consolidated annual financial statements
     for the year ended 31 March 2016 ("previous year"). The financial statements have been prepared under
     the supervision of the Chief Financial Officer, Les Davies CA(SA).

     The comparatives for the six months ended 30 September 2015 have been restated for the reclassifications
     made in the previous year. The detail of these reclassifications have been set out in note 2.2 in the previous
     year's annual financial statements. The reclassification has had the effect on the balance sheet as at
     30  September 2015 of decreasing trade and other receivables by R503.2 million, disclosing the reinsurance asset
     of R435.7 million and insurance premiums paid in advance of R1 317.4 million and increasing reinsurance
     and insurance liabilities by R1 249.9 million.
 
                                                                        6 months         6 months       12 months
                                                                           ended            ended           ended
                                                                         30 Sept          30 Sept        31 March
                                                                            2016             2015            2016
                                                                       Unaudited        Unaudited         Audited
                                                                              Rm               Rm              Rm
2.   Debtor costs 
     Bad debts, repossession losses and bad debt recoveries                415.7            243.9           765.8
     Movement in impairment provision                                       86.4            224.2           239.3
                                                                           502.1            468.1         1 005.1
3.   Investment income
     Interest - insurance business                                          58.0             39.4            85.3
     Dividends from listed investments - insurance business                    -             15.4            19.7
     Realised profit on disposal of insurance investments                      -             12.5           495.6
                                                                            58.0             67.3           600.6

     The move from term to monthly insurance policies will significantly reduce the capital required by the
     group's insurance subsidiary. To limit risk, the insurance subsidiary in the prior year sold the equity and
     a large portion of the bond portfolio releasing a capital gain of R495.6 million which was included in
     investment income (taxed at capital gains rate).

4.   Insurance investments available-for-sale
     Listed
     Listed shares                                                             -            843.0               -
     Fixed income securities                                               449.9            864.4           432.0
     Unlisted  
     Money market                                                          818.1            106.2         1 236.5
                                                                         1 268.0          1 813.6         1 668.5

     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.

     The decline in insurance investments is due to lower insurance reserves being required as a consequence of
     the group's insurance subsidiary now selling monthly policies as opposed to term policies previously sold.

5.   Trade and other receivables
     Instalment sale and loan receivables                                6 372.6          6 402.8         6 482.6
     Unearned provisions                                                 (550.8)          (612.7)         (606.3)
     Provision for unearned maintenance income                           (338.6)          (384.1)         (376.5)
     Provision for unearned initiation fees and unearned
     finance charges                                                     (212.2)          (228.6)         (229.8)
     Net instalment sale and loan receivables                            5 821.8          5 790.1         5 876.3
     Provision for impairment                                          (1 620.0)        (1 518.5)       (1 533.6)
                                                                         4 201.8          4 271.6         4 342.7
     Other receivables                                                     270.5            125.9           171.6
                                                                         4 472.3          4 397.5         4 514.3

     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 six to 36 months.

     The average effective interest rate on instalment sale and loan receivables is 22.3% (2015: 22.0%) and
     the average term of the sale is 32.9 months (2015: 33.4 months).

6.   Reinsurance and insurance liabilities
     Unearned premium reserve net of reinsurance                           475.6            814.2           726.8
     Unearned Insurance Premiums                                           710.2          1 226.2         1 090.8
     Less: reinsurer's share of unearned premiums                        (234.6)          (412.0)         (364.0)
     Due to reinsurers                                                      50.0            123.7            98.4
     Other insurance and reinsurance provisions                            249.5            334.2           327.9
     Gross reinsurance and insurance provisions                            284.7            357.9           361.2
     Less: reinsurer's share of insurance provisions                      (35.2)           (23.7)          (33.3)
                                                                           775.1          1 272.1         1 153.1
     Disclosed as:
     Reinsurance assets                                                  (269.8)          (435.7)         (397.3)
     Reinsurance and insurance liabilities                               1 044.9          1 707.8         1 550.4
                                                                           775.1          1 272.1         1 153.1

     Reinsurance and insurance liabilities have declined due to the group's insurance subsidiary now selling
     monthly policies as opposed to term policies previously sold.

7.   Purchase of businesses
     Trademarks                                                            (8.4)                -           (6.0)
     Property, plant and equipment                                         (3.7)                -           (3.1)
     Inventory                                                            (23.2)                -          (26.5)
     Trade receivables                                                    (73.1)                -          (77.5)
     Accounts Payable                                                        3.5                -             6.2
     Deferred tax                                                            1.6                -             5.4
     Goodwill                                                              (8.9)                -               -
     Gain on acquisition of Beares                                           1.2                -             0.4
     Total consideration                                                 (111.0)                -         (101.1)

     During the current period, the group's subsidiaries in Namibia and Swaziland have acquired on 8 May
     2016 and 8 April 2016 respectively, the businesses trading under the Ellerines and Beares brands from the
     relevant in-country subsidiaries of Ellerines Services Proprietary Limited (subsidiary of Ellerines Furnishers
     Proprietary Limited in business rescue). The businesses, which are individually and collectively immaterial,
     consisted of 26 stores, the Ellerines and Beares brands, trade receivables, inventory and fixed assets.
     The purchase consideration was paid by cash and assumption of liabilities. The stores will trade either
     under the Lewis or Beares brands.

     In the prior year, the group's subsidiaries in Lesotho and Botswana have acquired on 8 December 2015
     and 8 March 2016 respectively, the businesses trading under the Ellerines and Beares brands from the
     relevant in-country subsidiaries of Ellerines Services Proprietary Limited (subsidiary of Ellerines Furnishers
     Proprietary Limited in business rescue). The businesses consisted of 30 stores, the Ellerines and Beares
     brands, trade receivables, inventory and fixed assets. The purchase consideration was paid by cash and
     assumption of liabilities. The stores are trading either under the Lewis or Beares brands.

                                                                         6 months        6 months       12 months
                                                                            ended           ended           ended
                                                                          30 Sept         30 Sept        31 March
                                                                             2016            2015            2016
                                                                        Unaudited       Unaudited         Audited
                                                                               Rm              Rm              Rm
8.   The rate of taxation on profit     
     is reconciled as follows:    
     Profit before taxation                                                 252.5           417.3         1 279.5
     Taxation calculated at a tax rate of 28% (2015: 28%)                    70.7           116.8           358.3
     Differing tax rates in foreign countries                                 4.2             4.0             5.4
     Disallowed expenses                                                      3.3             5.5            11.2
     Exempt income (refer to note 3)                                            -           (5.5)          (54.7)
     Prior years                                                                -           (1.5)           (2.2)
     Taxation per income statement                                           78.2           119.3           318.0
     Effective tax rate                                                     31.0%           28.6%           24.9%

9.   Regulatory matters
     Referrals by National Credit Regulator to National Consumer Tribunal
     First referral
     In July 2015, the National Credit Regulator ("NCR") referred both Lewis Stores ("Lewis") and Monarch
     to the National Consumer Tribunal ("NCT") for alleged breaches of the National Credit Act ("NCA") in
     relation to the sale of loss of employment insurance and disability cover to customers who were pensioners
     or self-employed persons. Following the notification of the referral, an internal investigation identified
     approximately 15% of cases where loss of employment insurance policies were invalidly sold to pensioners
     and self-employed customers as a result of human error at store level. Lewis is currently refunding the
     premiums and interest totalling approximately R67.7 million to the affected customers. To date, Lewis has
     reimbursed approximately 93% of amounts due.

     In September 2016, the NCT delivered its judgment in the abovementioned matter. The main findings
     of the NCT were:

     1. dismissed the NCR's application against Monarch;
     2. found that the offering of loss of employment insurance by Lewis to pensioners or self-employed
        consumers was unreasonable and therefore constituted prohibited conduct under the NCA;
     3. found that the offering of disability insurance by Lewis to pensioners would be unreasonable, unless
        further enquiry and clarification was obtained and recorded, which makes it clear that such consumers
        requested such insurance cover;
     4. found that the offering of disability insurance by Lewis to self-employed persons was not unreasonable;
     5. found that there is no clear basis on which the unreasonableness of the disability and loss of employment
        insurance has the effect of deceiving consumers;
     6. ordered that an independent audit be done of all credit agreements entered into by Lewis since 2007, for
        purposes of determining whether any pensioners or self-employed consumers were sold loss of employment
        insurance and whether any pensioners were sold disability insurance. If so, Lewis is to reimburse such
        consumers with any premiums and any interest charged on their accounts as a result of such insurance
        premiums. Consumers who no longer have open accounts with Lewis are to be traced and reimbursed.
        On completion of the independent audit, the NCT will set the matter down for hearing on the quantum
        of the administrative penalty to be imposed.

     Lewis appealed the judgment in October 2016. As a consequence of the appeal, the refund of disability
     insurance premiums and interest and the independent audit has been suspended pending the outcome of
     the appeal. However, as indicated above, Lewis will be continuing to refund loss of employment insurance
     premiums and interest to customers.

     Second referral
     In April 2016, the NCR referred Lewis Stores to the NCT for alleged breaches of the NCA relating to club
     fees and extended maintenance contracts charged to its customers. Lewis has opposed the second referral
     and filed a comprehensive answering affidavit disputing the NCR's allegations. A date for the hearing of this
     matter is likely to be set by the NCT at a pre-hearing meeting held on 7 November 2016.

     High Court summonses
     In February 2016, Lewis was served with a summons issued in the name of 15 plaintiffs and in April 2016
     a second summons was served by 13 plaintiffs, all plaintiffs being existing or previous customers of Lewis.
     The summons were issued at the direction of Summit Financial Partners. The total quantum of both claims
     is R85 082 plus interest. The plaintiffs' claims are for damages as a consequence of alleged breaches of the
     NCA in relation to delivery charges and extended maintenance contracts. Lewis disputes liability on the
     merits and various other grounds and is contesting the action.

     Section 165 of Companies Act
     First demand
     In May 2016, Mr David Woollam addressed a letter to the Lewis board of directors demanding that Lewis
     commences with proceedings to declare Johan Enslin, Les Davies, David Nurek and Hilton Saven, delinquent
     directors in accordance with the provisions of section 165 of the Companies Act. The directors of the board
     of Lewis, who had not been made the subject of the demand, considered the demand, and consulted the
     group's attorneys. Having done so, the directors were satisfied that the demand of Mr Woollam was frivolous,
     vexatious and of no merit and they resolved that Lewis launch proceedings in terms of section 165(3) of
     the Companies Act to set the demand aside.

     In October 2016, the Court handed down judgment in Lewis' favour and set aside, in terms of section 165(3)
     of the Companies Act, Mr Woollam's demand and awarded Lewis costs against Mr Woollam. In November
     2016, Mr Woollam filed an application for leave to appeal the judgement. A date still has to be arranged
     between the parties and the Court for such application to be heard. Lewis will be opposing the application
     for leave to appeal.

     Second demand
     In August 2016, Mr Woollam addressed a further letter ("the second demand") to the Lewis board of
     directors demanding that Lewis commences with proceedings to declare the abovementioned directors,
     delinquent directors in accordance with the provisions of section 165 of the Companies Act. The directors of
     the board of Lewis, who had not been made the subject of the second demand, considered such demand,
     and consulted the group's attorneys. Having done so, the directors were satisfied that the demand of
     Mr Woollam was once again frivolous, vexatious and of no merit and they resolved that Lewis launch
     proceedings in terms of section 165(3) of the Companies Act to set the demand aside. These proceedings
     were launched in September 2016.

10.  Credit risk
10.1 Credit granting
     The group has developed advanced credit-granting systems to properly assess the customer. The credit
     underwriting process flows through the following stages:

     - Credit scoring: This involves the gathering of appropriate information from the client, use of credit
       bureaus and third parties such as employers. These input variables are run through the various credit scorecards.
     - Assessing client affordability: This process involves collecting information regarding the customer's
       income levels, expenses and current debt obligations.
     - Determining the credit limit for the customer: The customer's risk score determined by the scorecard
       together with the expense assessment and outstanding obligations are used to calculate a credit limit
       within the customer's affordability level.

     The credit-granting systems enable the group to determine its appetite for risk. In determining the acceptable
     level of risk, the potential loss is weighed up against the revenue potential using the predictive behavioural
     models inherent in the credit-granting system. The group monitors any variances from the level of risk that
     has been adopted and adjusts the credit-granting process on a regular basis.

10.2 Impairment provision
     The customers payment profile is managed using payment ratings. Payment ratings are determined on an
     individual customer level and aggregated over all the customer's sub-accounts. Payment ratings measure
     the customers actual payments received over the lifetime of the account relative to the instalments due in
     terms of the contract. These payment ratings are used to categorise and report on customers at the store
     level to follow up the slow paying and non-performing customers. There are 13 payment rating categories
     a customer can fall into following the monthly assessment. The payment rating is integral to the calculation
     of the debtor's impairment provision. Impaired receivables are carried at their net present value of the
     estimated future cash flows from such accounts, discounted at the original effective interest rate implicit
     in the credit agreement. Estimated future cash flows are projected utilising the payment ratings.

     The impairment calculation is performed on a monthly basis taking into account the payment behaviour of
     the debtor's book having regard to the payment rating and age of the debtor's account. Various profiles of
     the impairment provision are prepared monthly. The credit risk systems also produces customer payment
     data. The aforementioned and the key indicators are monitored by senior management to analyse and
     assess the state of the debtor's book. Daily collection statistics are also collated to identify trends early.

     The key indicators that are reviewed include, inter alia, the following:
     -  Number of satisfactorily paid customers. While the expectation is that the gross receivables would be the
        key indicator, this is not the case as there is a distortion created by the slow-paying and non-performing
        customer's balances growing faster than satisfactory paid customers due to longer term business settling
        in the base. The key operational objective is to have as many satisfactory paid customers as possible as
        it is the group's expectation that these customers will settle their accounts, albeit that certain categories
        of satisfactory paid customers may settle past their contractual term. Satisfactory paid customers are
        the source of future repeat business which is one of the core strengths of the business model.

     -  The level of impairment provision applicable to the payment rating and the trend thereof over the
        months. This is correlated with collection statistics and customer payment data produced by the credit
        risk systems.

10.3 Contractual arrears
     The key aspect of the arrear calculation is Lewis's policy not to reschedule arrears nor to amend the terms
     of the original contract. In other words, the contractual arrears calculated is the actual arrears in terms of
     the originally signed agreement. The group does not consider arrears the leading indicator, but rather
     relies on payment ratings.

10.4 Debtor costs (Impairment losses)
     The group employs a store-based collection system which allows the collection staff to deal with customers
     face to face, thus maximising collections and minimising debtors costs. Bad debt write-offs are initiated
     where the customer payment behaviour cannot be rehabilitated. Bad debts result where the customer's
     account is written off or the goods repossessed. The decision to write-off will take into account where
     applicable, recent payment behaviour, payment ratings, age of the account, whether the customer has
     exceeded their contractual terms and arrears. Debtor costs are set out in note 2.

10.5 Debtors' Analysis
     Combined impairment and contractual arrears table

     The table reflects the following:
     -  A summary of the four main groupings of payment ratings describing payment behaviour.
        The payment ratings categorise individual customers into 13 payment categories. For purposes of this table, 
        the payment ratings have been summarised into four main groupings.
     -  For each of the four main groupings of payment ratings, the following is disclosed:
        -  Number of customers.                                                                   
        -  Impairment provision allocated to each grouping.
        -  Gross receivables. Note that unearned provisions have not been included in this amount. 
        -  Contractual arrears for each grouping split per number of instalments in arrears.

     The table referred to above is set out below:

     Gross debtor analysis                                                           Number of          Gross     Impairment          Total                            Instalments in arrears
                                                                                     customers    receivables      provision        arrears              1               2              3             4           >4
     Customer grouping                                            Period                 Total          R'000          R'000          R'000          R'000           R'000          R'000         R'000        R'000
     Satisfactory paid                                         Sept 2016     No        442 103      3 616 595         37 673        629 534        167 576         119 407         89 852        67 936      184 763
     Customers fully up to date including those who have                      %           67.9           56.9            2.3
     paid 70% or more of amounts due over the contract         Sept 2015     No        471 067      3 704 323         29 763        604 044        170 442         118 611         87 217        64 430      163 344
     period. The provision in this category results from in                   %           68.1           58.0            2.0
     duplum provision.                                          Mar 2016     No        459 390      3 775 137         38 319        641 286        175 898         121 896         90 493        67 565      185 434
                                                                              %           68.8           58.2            2.5
     Slow payers                                               Sept 2016     No         53 090        540 194        187 597        324 927         36 791          35 727         33 884        31 618      186 907
     Customers fully up to date including those who have                      %            8.2            8.5           11.6
     paid 65% to 70% of amounts due over the contract          Sept 2015     No         55 647        524 883        155 838        289 009         36 313          35 011         32 555        29 822      155 308
     period. The provision in this category for the current                   %            8.1            8.2           10.3
     period ranges from 14% to 66% (Sept 2015: 12% to           Mar 2016     No         54 507        558 758        176 249        313 201         37 684          36 322         33 604        30 913      174 678
     72%) of amounts due.                                                     %            8.1            8.7           11.5
     Non-performing accounts                                   Sept 2016     No         49 167        585 809        248 481        372 092         34 396          32 708         31 563        30 298      243 127
     Customers who have paid between 55% and 65% of                           %            7.6            9.1           15.3
     amounts due over the contract period. The provision       Sept 2015     No         50 641        546 102        212 694        318 561         32 894          30 878         29 332        27 859      197 598
     on this category for the current period ranges from                      %            7.3            8.5           14.0
     24% to 78% (Sept 2015: 23% to 84%) of amounts due.         Mar 2016     No         50 690        589 858        241 999        353 286         35 071          33 189         31 195        29 501      224 330
                                                                              %            7.6            9.1           15.8
     Non-performing accounts                                   Sept 2016     No        106 643      1 629 870      1 146 198      1 125 994         73 369          72 060         71 016        70 022      839 527
     Customers who have paid 55% or less of amounts                           %           16.3           25.5           70.8
     due over the contract period. The provision in this       Sept 2015     No        113 869      1 627 385      1 120 179      1 103 400         73 851          72 336         70 696        69 257      817 260
     category for the current period ranges from 33% to                       %           16.5           25.3           73.7
     100% (Sept 2015: 31% to 100%) of amounts due.              Mar 2016     No        103 495      1 558 864      1 077 046      1 068 377         70 458          68 649         66 504        64 447      798 319
                                                                              %           15.5           24.0           70.2
                                                               Sept 2016               651 003      6 372 468      1 619 949      2 452 547        312 132         259 902        226 315       199 874    1 454 324
                                                               Sept 2015               691 224      6 402 693      1 518 474      2 315 014        313 500         256 836        219 800       191 368    1 333 510
                                                                Mar 2016               668 082      6 482 617      1 533 613      2 376 150        319 111         260 056        221 796       192 426    1 382 761

                                                                                         Gross       Unearned            Net
                                                                                   receivables      provision     receivable     Impairment     Impairment
     Net debtor analysis                                          Period                 R'000          R'000          R'000          R'000              %
                                                               Sept 2016             6 372 468      (550 728)      5 821 740      1 619 949           27.8
                                                               Sept 2015             6 402 693      (612 714)      5 789 979      1 518 474           26.2
                                                                Mar 2016             6 482 617      (606 354)      5 876 263      1 533 613           26.1

       KEY RATIOS
                                                                6 months          6 months        12 months
                                                                   ended             ended            ended
                                                                 30 Sept           30 Sept         31 March
                                                                    2016              2015             2016
    Operating efficiency ratios
    Gross profit margin                                            40.5%             36.4%            38.0%
    Operating profit margin                                        10.0%             14.7%            14.1%
    Number of stores                                                 780               724              760
    Number of permanent employees                  (average)       8 767             8 421            8 409
    Trading space                                      (sqm)     260 934           241 812          254 566
    Inventory turn                                                   3.6               3.3              3.7
    Current ratio                                                    3.6               2.6              3.5
    Credit ratios
    Credit sales                                                   63.4%             65.9%            64.3%
    Debtor costs as a percentage of the net debtors                 8.6%              8.1%            17.1%
    Debtors' impairment provision as a percentage
    of net debtors                                                 27.8%             26.2%            26.1%
    Arrear instalments on satisfactory paying accounts
    as a percentage of gross debtors                                9.9%              9.4%             9.9%
    Arrear instalments on slow-paying and
    non-performing accounts as a percentage
    of gross debtors                                               28.6%             26.7%            26.8%
    Credit applications decline rate                               40.5%             40.8%            39.3%
    Shareholder ratios
    Net asset value per share                        (cents)       6 040             6 104            6 158
    Gearing ratio                                                  18.8%             27.6%            25.5%
    Dividend payout ratio                                          55.0%             70.7%            52.7%
    Return on average equity (after-tax)                            6.4%             11.0%            17.6%
    Return on average capital employed (after-tax)                  6.4%              9.6%            14.7%
    Return on average assets managed (pre-tax)                      7.6%             10.8%            15.9%
    
    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 88 790 000 shares in issue (2015: 88 808 000).
    3. Total assets exclude the deferred tax assets and reinsurance asset.
    4. Prior period ratios have been recalculated for the reclassifications made in the 2016 financial year.                                                             

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

These results are also available on our website: www.lewisgroup.co.za
Date: 09/11/2016 07:05:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE'). 
The JSE does not, whether expressly, tacitly or implicitly, represent, warrant or in any way guarantee the truth, accuracy or completeness of
 the information published on SENS. The JSE, their officers, employees and agents accept no liability for (or in respect of) any direct, 
indirect, incidental or consequential loss or damage of any kind or nature, howsoever arising, from the use of SENS or the use of, or reliance on,
 information disseminated through SENS.

Share This Story