24 Aug - 4 min read

GCR places Lewis’ rating of A(za) on positive outlook following strong earnings performance

GCR places Lewis’ rating of A(za) on positive outlook following strong earnings performance

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 PLACES LEWIS’ RATING OF A(za) ON POSITIVE OUTLOOK FOLLOWING STRONG
EARNINGS PERFORMANCE

Lewis Group is pleased to advise that on 24 August 2021 Global Credit Ratings ("GCR")
affirmed Lewis Group’s Long-term national scale Issuer rating at A(za) and Short-term rating
at A1(za). The Outlook has been revised to Positive, from Stable previously.

The ratings are as follows:
National long-term rating: A(za)'
National short-term rating: A1(za)'
Outlook: Positive

The announcement released by the GCR follows:

The Positive Outlook on Lewis’ ratings factor in a healthier debtors book and improved
operational efficiencies which should continue to enhance profitability margins.
Furthermore, the group remains conservatively leveraged and has strong liquidity coverage.

Lewis reported growth in revenues of 4.2% in FY21, despite losing R360m in sales and
R250m in collections due to COVID19 related disruptions in the first quarter of their
financial year. Revenue growth was underpinned by a strong recovery in merchandise sales
in the second half of the year driven by an increase in cash sales of 25.9%, supported by the
extension of social relief grants and relatively higher levels of disposable income in the
group's target market. Operating costs have continued to be well managed and recorded a
2.9% reduction for the year. The adoption of enhanced collection procedures had a positive
impact on the debtors book which saw the proportion of satisfactory paid customers
increase to 74.4% (FY20: 70.5%), surpassing previously communicated targets. The
improved performance led to a R110m release from the impairment provision and an
overall reduction in debtor costs as a percentage of gross debtors to 14.3% (FY20: 17.6%).
Resultantly, the revenue based operating margin made a strong come-back to 10.3% from
3.9% in the prior year, recording the highest level since FY16. GCR expects the margin to
continue trending in the 10%-15% target range over the medium term, barring any
additional shocks to the economy.

Despite the improved performance, in GCR’s view, the group’s relatively narrow product
diversification and concentration of sales by brand remain rating constraints. The group also
has limited geographic diversification, with c.85% of revenue generated in South Africa.
Nonetheless, the group’s growing footprint, with 807 stores at FY21 and at least 15
additional openings planned in FY22, enhances their reach to ensure accessibility to their
respective target markets. Some stores were impacted by the civil unrest and looting that
broke out during the June-July 2021 period, but any damage suffered is expected to be fully
recovered from insurance proceeds.

Lewis’ strong leverage profile is underpinned by the absence of any interest-bearing debt on
its balance sheet since FY19, notwithstanding the temporary draw down at FY20 to shore up
liquidity as a counter measure to the effects of the pandemic. Future debt draw downs on
available facilities are expected to be largely managed in line with working capital demands
during peak trading periods. As such, the group is anticipated to continue to report a net
ungeared balance sheet, excluding lease liabilities. Available cash flows will be applied to
pay out dividends, fund the ongoing share buy-back programme and minimal expansionary
capex. This is backed by the unutilised available funding lines from multiple banks and
Lewis’ strong cash flow generation capability. Thus, GCR’s uses versus sources liquidity
coverage ratio is projected in excess of 2x over the upcoming 12 months.

Outlook Statement

The Positive Outlook reflects GCR’s expectation that positive sales growth coupled with the strong
performance of the debtors book will be sustained and will translate into enhanced margins. Lewis is
also expected to maintain a net ungeared balance sheet and robust liquidity coverage.

Rating Triggers

Upward rating migration could result from continued positive earnings performance with the
operating margin sustained above 10%, or improved product diversification, while maintaining
financial discipline. The outlook may be revised to stable if the debtors book performance
deteriorates, or there is an unexpected increase in leverage


Cape Town
24 August 2021

Equity Sponsor:
UBS South Africa (Pty) Ltd

Debt Sponsor:
Absa Bank Limited, acting through its Corporate and Investment Banking Division

Date: 24-08-2021 03:00:00
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