Johannesburg, 4 November 2020 – GCR Ratings (“GCR”) has affirmed Lewis Group Limited’s (“Lewis” or “the group”) long and short-term national scale issuer ratings of A(ZA) and A1(ZA) respectively, with a Stable Outlook.
|Rated Entity||Rating class||Rating scale||Rating||Outlook / Watch|
|Lewis Group Limited (“Lewis”)||Long Term Issuer||National||A(ZA)||Stable Outlook|
|Short Term Issuer||National||A1(ZA)|
The ratings assigned to Lewis balance the retailer’s strong financial profile, with its exposure to the discretionary retail sector, which is vulnerable to adverse macroeconomic changes, as well as its relatively narrow product profile compared to other diversified local retailers.
Lewis’s revenue increased 5.2% to R6.5bn at FY20, but this largely reflected pre-COVID-19 performance, with only 8 trading days lost at the end of March. Nevertheless, the group lost around R80m in sales and R180m in collections as the store closures coincided with the critical month-end collection days. As such the collection rate for the year was 74.5%, compared to 77.3% for the 11 months to February. The COVID-19 lockdown did result in a significant loss in 1Q 2021 trading days, but sales have been strong since stores started reopening in May 2020 (stores opened with full merchandise offering on the 1st of June 2020), led by growth in cash sales. However, collections performance is expected to deteriorate, with satisfactory paid customers projected to decline to the 64%-67% range, from 70%-72%. As such, the group raised a R211m impairment, which led to a 37.8% increase in debtor costs at FY20. Nonetheless, GCR expects the operating margin to improve from 3.9% at FY20 (FY19: 7.2%) to the lower end of management’s projected 5%-7% range, albeit remaining below historical levels as there is persistent pressure on discretionary spending in the middle to low income consumer brackets that make up Lewis’ target market.
From having no debt during most of the year, Lewis drew down on an aggregate of R922m in short-term facilities towards year-end FY20 to shore up liquidity in anticipation of COVID-19 related disruptions. However, the additional liquidity was not necessary, and as sales volumes picked up post the lockdown, the group repaid the facilities from available cash. However, with the implementation of IFRS 16 Lewis reported R837.9m in lease liabilities, which is expected to increase in line with the expansion of the store footprint. GCR does not anticipate any further debt draw downs in the short to medium term, therefore, credit protection metrics are expected to remain very strong.
Supported by internal cash generation and minimal capex requirements, the liquidity assessment continues to provide ratings uplift. Subsequent to the redemption of debt after year-end, all of the facilities available to the group were unutilised, supporting the strong 12-month liquidity coverage of more than 2.0x. Lewis has funding lines from four South African banks, as well as an unutilised R2bn DMTN programme, which together with the significant headroom on all its covenants, support GCR’s view of a strong liquidity assessment.
The Stable Outlook reflects GCR’s expectation that Lewis will continue to report a strong financial profile, characterised by 12-month liquidity coverage in excess of 2x and a net ungeared balance sheet, despite the negative impact of COVID-19 on earnings progression.
Upward rating migration could result from 1) continued expansion of the business that results in greater product diversity; 2) sustained revenue growth and an improvement in the operating margin to within the 10-15% range, coupled with sustained low leverage. The rating could be downgraded if 1) credit losses increase beyond expectations and negatively impact earnings; 2) if there is a material unexpected increase in leverage; or 3) if 12-month liquidity coverage reduces to less than 2x.
|Primary analyst||Tinashe Mujuru||Credit Analyst: Corporate Ratings|
|Johannesburg, ZA||TinasheM@GCRratings.com||+27 11 784 1771|
|Committee chair||Matthew Pirnie||Group Head of Ratings|
|Johannesburg, ZA||MatthewP@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Corporate Entities, May 2019|
|GCR’s Country Risk Score report, published May 2020|
|GCR’s SA Sector Risk Score report, published July 2020|
|GCR Rating Scales Symbols and Definitions, May 2019|
Lewis Group Limited
|Rating scale||Review||Rating class||Rating||Outlook/Watch||Date|
|Long Term Issuer||Initial||National||A(ZA)||Stable Outlook||Sept 2013|
|Short Term Issuer||National||A1(ZA)|
|Long Term Issuer||Last||National||A(ZA)||Stable Outlook||Aug 2020|
|Short Term Issuer||National||A1(ZA)|
Risk Score Summary
|Rating components & factors||Risk scores|
|Management & governance||0.00|
|Leverage and cash flow||1.50|
|Total Risk Score||13.00|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|Issuer||The party indebted or the person making repayments for its borrowings.|
|Leverage||With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|Liquidity||The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
|Long Term Rating||See GCR Rating Scales, Symbols and Definitions.|
|Maturity||The length of time between the issue of a bond or other security and the date on which it becomes payable in full.|
|Portfolio||A collection of investments held by an individual investor or financial institution. They may include stocks, bonds, futures contracts, options, real estate investments or any item that the holder believes will retain its value.|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Short Term Rating||See GCR Rating Scales, Symbols and Definitions.|
Salient Points of Accorded Ratings
GCR affirms that a.) no part of the ratings process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit ratings have been disclosed to Lewis Group Limited. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.
Lewis Group Limited participated in the rating process via management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered to be adequate and has been independently verified where possible. The information received from Lewis Group Limited and other reliable third parties to accord the credit ratings included:
- The audited financial results at March 2020 (plus four years of comparative, audited financials)
- Covenant compliance certificates at March 2020
- The March 2020 integrated report
- Capex budgets
- Funding profile at August 2020
- Results presentation