RATING RATIONALE
Global Credit Ratings has accorded the above credit rating(s) on Lewis Group Limited based on the following key criteria:
Lewis Group Limited (“Lewis”) is a leading furniture retailer with a branch network spanning rural and urban areas across South Africa and some neighbouring countries. Sales are facilitated by in-house credit facilities and credit life insurance, which along with related service charges account for almost half of group revenue. Although smaller than its competitors, its focus on strong customer relationships has seen it outperform the industry in terms of sales and bad debt experience. In this regard, Lewis has demonstrated a consistent track record of operating profit growth through both strong and weak economic environments since 2001.
Revenue increased 7% to R5.2bn in F13, but operating profit rose by a slightly firmer 10% to R1.2bn, due to an increase in credit sales and longer term contracts. As a result, the operating profit margin edged up to a 5-year period high 24% in F13, at the top end of management’s target.
As debtors form the group’s largest risk exposure, granting credit is managed centrally using advanced risk and behavioural scorecards, as well as a complete affordability assessment. The strict enforcement of policies has seen the number of credit applications rejected rise in the current economic climate. Thus, despite the robust growth in credit sales in F13, both the impairment provision (17.4%) and the debtors cost ratio (9.4%) declined, and were below management’s target level.
While debt has doubled to R1.5bn over the review period, this has been countered by substantial retained earnings, and consequently low gearing of 29.9% was reported at FYE13 (FYE12: 23.3%). Net debt to EBITDA has crept up above 100%, but debt is covered more than 3x by the debtors book. This implies that were growth to slow, substantial cash would be generated from collections and available to repay debt. With net interest coverage above 10x, liquidity thus appears sound.
Lewis’ rating takes cognisance of its strong track record, and expectations that growth will continue. Thus, upwards rating migration is only likely over the medium to long term, if revenue and operating growth persist. A sustained improvement in demand for durable goods, and lessening of the general debt burden faced by consumers would also be positive. Conversely, an adverse change to the regulatory environment that significantly impacts finance and/or insurance income would lead to negative rating pressure. Such risks are considered in light of the increased regulatory scrutiny that providing credit to the lower LSM segments has come under. In addition, a further worsening of the credit retail environment could affect both top line growth and lead to higher bad debt costs.
| ANALYTICAL CONTACTS | |
| Primary Analyst | |
| Eyal Shevel | |
| Sector Head: Corporates | |
| +27 11 784 1771 | |
| shevel@globalratings.net | |
| Committee Chairperson | |
| Marc Chadwick | |
| Regional Sector Head: Insurance | |
| +27 11 784 1771 | |
| chadwick@globalratings.net | |
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
GCR’s Criteria for Rating Corporate Entities
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO/RATING-SCALES-DEFINITIONS. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
Lewis Group Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit rating/s has been disclosed to Lewis Group Limited with no contestation of the rating.
The information received from Lewis Group Limited and other reliable third parties to accord the credit rating included the latest available audited annual financial statements (plus four years of comparative numbers), internal and/or external management reports, full year budgeted financial statements, most recent year to date management accounts (where necessary), corporate governance and enterprise risk framework, industry comparative data and regulatory framework and a breakdown of facilities available and related counterparties. In addition, information specific to the rated entity and/or industry was also received.
