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LEWIS GROUP LIMITED - GCR affirms national scale issuer rating on Lewis at A(za) on strong financial profile outlook stable

Release Date: 05/09/2019 15:09
Code(s): LEW     PDF:  
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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
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