LEWIS GROUP LIMITED - LEWIS Group credit ratings affirmed; outlook changed to negative

LEWIS Group credit ratings affirmed; outlook changed to negative

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

LEWIS GROUP CREDIT RATINGS AFFIRMED; OUTLOOK CHANGED TO NEGATIVE

Lewis Group is pleased to advise that on 31 August 2017 Global Credit Ratings (“GCR”) affirmed the group’s
credit ratings with a negative outlook.

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

The announcement released by GCR follows:

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

The ratings take cognisance of Lewis’ solid market position in the specialty retail category, and demonstrated
ability to maintain sound gross profit margins through the cycle. This, however, is offset by its narrow business
focus and thus its limited adaptability to a very challenging operating landscape. Accordingly, the Negative
Outlook takes into account the constrained performance across Lewis’ key brands and the risk that the group
may not be able to stabilise and grow earnings over the medium term, beyond expected weakness in FY18.

Revenues have stagnated, whilst prolonged earnings weakness has manifested in the wake of the depressed
domestic economy and notable changes to credit laws. Whilst the group will continue to pursue incremental
initiatives to lower costs and drive expansion initiatives to address the weak demand conditions, operating
margins are projected to continue to slide to 5-year low of between 5% to 8%, trending well below levels of
over 20% historically.

Cash flows from operations remain sound, although this may deteriorate over the medium term if Lewis is
unable to initiate sufficient new credit sales or generate cash flows from alternative initiatives.

Positive rating factors draw from the significant redemption of outstanding debt evidenced in FY17, with
subsequent proceeds from the insurance asset sales used to reduce leverage to very low levels, with net debt
to EBITDA reported at 24%. In an effort to optimise the balance sheet further in the face of the weak trading
environment, the group plans to become ungeared by year-end FY18 and pay down all existing term
obligations by year-end FY19. At the same time, current committed undrawn revolving credit facilities total
R800m (and are expected to increase to R1.1bn by FY19) to allow for flexibility when the market recovers or to
pursue suitable acquisitions.

Asset quality has remained relatively stable, with the total level of non-performing gross receivables reported
at a fairly flat 34% (FY16: 33%). That said, note is taken of the R272m increase in bad debts in FY17, indicating
the financial duress of consumers. Management are expecting a modest improvement in debtor costs,
although these are likely to continue to weigh on profitability going forward.

GCR also takes note of lengthy pending legal disputes that could have potential negative financial and longer-
term reputational ramifications.


Potential upward rating movements would only likely materialise on the back of notable improvements in the
operating environment, with the company demonstrating a sustained improvement in trading and earnings
growth over the medium term, while maintaining conservative gearing and good liquidity. The ratings could be
downgraded if GCR comes to expect that revenues and earnings will not recover from projected FY18 levels,
and/or if financial policies become more aggressive. Should regulatory changes or adverse legal findings
materially impact on the business this could also pressurise the ratings.”

Cape Town
31 August 2017
Sponsor: UBS South Africa (Pty) Ltd

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