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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').
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