GCR affirms national scale issuer rating on Lewis at A(za) on strong financial profile – outlook stable Lewis Group Limited Incorporated in the Republic of South Africa Registration number 2004/009817/06 JSE share code: LEW ISIN: ZAE000058236 Bond Code: LEWI (“Lewis Group” or “Lewis”) GCR AFFIRMS NATIONAL SCALE ISSUER RATING ON LEWIS AT A(ZA) ON STRONG FINANCIAL PROFILE – OUTLOOK STABLE Lewis Group is pleased to advise that on 05 September 2019 Global Credit Ratings (“GCR”) affirmed the group’s Long term national scale Issuer rating at A(za) and Short term rating at A1(za); 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 the GCR follows: “The ratings on Lewis Group Limited (“Lewis”, “the group”) reflects its strong financial profile and its well-entrenched local brands and distribution network, albeit counterbalanced by its narrow product profile, reliance on credit extension and modest earnings performance. Lewis’ credit profile has been supported by its focus on reducing debt since FY16, materially strengthening the group's balance sheet, during a time of severe earnings pressure. Excess cash flows were used to repay almost R2bn in debt over last three years, leaving the group unleveraged at FY19. GCR expects that Lewis will sustain its strong credit ratios over the near to medium term, as debt levels are kept modest and balanced against expected business growth. Positive rating factors also include the group’s very strong liquidity profile. Projected sources of funds exceed projected uses by more than 2x over the next 12 months and by at least 1.5x over the subsequent 12 months. Lewis remains highly cash generative, which is expected to be more than sufficient to invest in modest growth and return cash to its shareholders, whilst the group also has available committed undrawn revolver lines of R750m. Solid relationships with banks and ample covenant headroom further support GCR’s view. The low growth environment and structural changes in credit regulations have driven a sharp erosion in the group’s performance over the past five years to FY18. EBITDA margins fell to 8.4% in FY18 from 25% in FY13. However, there has been a recent improvement in performance, with growth in revenues and earnings in FY19 supported by management’s progress on operational initiatives to broaden its market segments and distribution in terms of market channels and credit/cash sales. In GCR’s view these factors should continue to support the group's operating margin in line with management’s target range of 7-10% for FY20, whilst sustained growth in credit sales (FY19: 8.1%; FY18: 10.7%) is expected to drive margin accretive financial services income streams over the medium term. It is expected that Lewis' business risk profile will continue to benefit from its established position as a value furniture retailer, albeit exposed to discretionary spending, particularly in the more sensitive lower income segments, and a highly competitive furniture market. The group's narrow product mix and relative concentration of sales generated by one brand (Lewis) and high exposure to South Africa (84% of revenues) are also considered rating constraints. GCR also recognises that Lewis remains highly vulnerable to ongoing developments in local credit regulations and the credit cycle, given that credit extension significantly supports merchandise sales (58%) and the overall contribution of financial services (interest and insurance income) to revenues (31%) and profits. Nevertheless, GCR draws comfort from Lewis’ long track record and extensive know-how in credit retail, underpinned by strong loan origination and credit underwriting practices, with a focus on a centralised risk management approach, which help mitigate asset quality risks. To this end, Lewis remains proactive in its collection strategies, while provisioning for the total loan book appears appropriate. Furthermore, at FY19 impairment provisions covered 144% of instalments in arrears over three months. The Outlook is Stable, which reflects an expectation that Lewis will maintain its strong financial profile, whilst operating performance should continue to show progressive improvement. Upward rating momentum could arise on the back of continuing revenue growth and meaningful operating margin enhancement to around 12-15% over the medium term, while maintaining low leverage and high levels of liquidity. Downward pressure on the rating would reflect weaker operating performance or an unexpected increase in leverage that negatively impact credit metrics.” Cape Town 05 September 2019 Equity Sponsor: UBS South Africa (Pty) Ltd Debt Sponsor: Absa Bank Limited, acting through its Corporate and Investment Banking Division Date: 05/09/2019 03:09:00 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.