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

Release Date: 03/09/2018 12:30
Code(s): LEW     PDF:  
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Lewis Group credit ratings affirmed; outlook changed to stable

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 is pleased to advise that on 31 August 2018 Global Credit Ratings (“GCR”) affirmed the group’s
credit ratings with a stable outlook.

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

The announcement released by GCR follows:

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

GCR has changed the outlook on Lewis’ ratings to Stable as the group has notably deleveraged its balance
sheet, which has prevented a material weakening in its credit metrics at a time of ongoing pressure on
earnings. At FY18, the group reported a net ungeared position of R77m, gross gearing of 10% and plans to
deleverage the balance sheet completely in FY19, utilising cash balances reported of around R600m to pay off
the R503m in maturing term debt.

Furthermore, GCR has considered the recent transformation measures undertaken aimed at gradually
diversifying the group’s narrow business focus by product and target segments in an attempt to stabilise
revenues and earnings, which have been notably impeded by the low growth environment and structural
changes in credit regulations. This also illustrates the group’s variability to local market swings, given limited
geographic diversity. The durable goods retail market is seeing some signs of recovery, from which Lewis is
well-positioned to benefit, although GCR recognises that the group’s turnaround phase will persist during most
of FY19. This means there will be little chance of a material strengthening in operating margins from the 6.8%
reported at FY18 until the medium term.

While cash balances are to be intermittently run down, GCR expects the liquidity profile to be supported over
the next 12 months by positive free cash flows and ample revolver availability. Committed undrawn facilities
currently total R900m, and may increase to R1.3bn by FY19, giving rise to significant funding flexibility.
Continued free cash flow generation, supported by collections on credit products, should provide sufficient
headroom for modest capex spend, dividends and continued share repurchases over the next year.

The group remains exposed to material asset quality risk, given the size of the net loan book, at 60% of total
assets. Nevertheless, Lewis remains proactive in its collection strategies, while provisioning for the total loan
book appears appropriate, with write-offs to gross receivables tracking below provisions made, thus mitigating
credit risk.

Potential upward rating movement is limited, given the still challenging conditions in the retail market and
would require the group to improve its competitive profile through business diversity and demonstrate a
sustained improvement in trading and earnings growth over the medium term. Conservative gearing and good
liquidity would also be required. The ratings could be downgraded in the event of a material worsening in
credit metrics, either through weaker operating performance or more aggressive financial policies.”

Cape Town

3 September 2018
Sponsor: UBS South Africa (Pty) Ltd

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