Announcements Corporate Rating Alerts

GCR affirms National Scale Issuer Rating on Lewis at A(ZA) on strong financial profile. Outlook Stable

Johannesburg, 5 September 2019 – GCR Ratings (“GCR”) has affirmed the Long term national scale Issuer rating assigned to Lewis Group Limited at A(ZA) and Short term rating at A1(ZA); with a Stable Outlook.

Rated Entity / Issue Rating class Rating scale Rating Outlook / Watch
Lewis Group Limited Issuer Long Term National A(ZA) Stable outlook
Issuer Short Term National A1(ZA)

Rating Rationale

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 installments in arrears over three months.

Outlook Statement

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.

Rating Triggers

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.

Analytical Contacts

Primary analyst Sheri Morgan Senior credit analyst
Johannesburg, ZA morgan@GCRratings.com +27 11 784 1771
Committee chair Eyal Shevel Sector Head: Corporate and Public Sector
Johannesburg, ZA shevel@GCRratings.com +27 11 784 1771

Related Criteria and Research

Criteria for the GCR Ratings Framework, May 2019
Criteria for Rating Corporate Companies, May 2019
GCR Country Risk Scores, June 2019
GCR Corporate Sector Risk Scores, June 2019

Ratings History

Lewis Group Limited

Rating class Review Rating scale Rating class Outlook Date
Issuer Long Term Initial National A(ZA) Stable September 2013
Last National A(ZA) Stable August 2018
Issuer Short Term Initial National A1(ZA) September 2013
Last National A1(ZA) August 2018

RISK SCORE SUMMARY

Risk score 14.50
Operating environment 13.00
Country risk score 7.50
Sector risk score 5.50
Business profile -1.00
Competitive position -1.00
Management and governance 0.00
Financial profile 2.50
Earnings performance -1.00
Leverage and capital structure 1.50
Liquidity 2.00
Comparative profile 0.00
Group support 0.00
Peer analysis 0.00

Glossary

Asset Quality Refers primarily to the credit quality of a bank’s earning assets, the bulk of which comprises its loan portfolio, but will also include its investment portfolio as well as off balance sheet items. Quality in this context means the degree to which the loans that the bank has extended are performing (ie, being paid back in accordance with their terms) and the likelihood that they will continue to perform.
Asset A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.
Balance Sheet Also known as Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.
Cash Flow The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.
Cash Funds that can be readily spent or used to meet current obligations.
Covenant A provision that is indicative of performance. Covenants are either positive or negative. Positive covenants are activities that the borrower commits to, typically in its normal course of business. Negative covenants are certain limits and restrictions on the borrowers’ activities.
Credit Risk The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and interest when due.
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.
Diversification Spreading risk by constructing a portfolio that contains different exposures whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.
Exposure Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding. In insurance, it refers to an individual or company’s vulnerability to various risks
Income Money received, especially on a regular basis, for work or through investments.
Interest Cover Interest cover is a measure of a company’s interest payments relative to its profits. It is calculated by dividing a company’s operating profit by its interest payments for a given 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.
Margin A term whose meaning depends on the context. In the widest sense, it means the difference between two values.
Market An assessment of the property value, with the value being compared to similar properties in the area.
Operating Margin Operating margin is operating profit expressed as a percentage of a company’s sales over a given period.
Origination A process of creating assets.
Provision The amount set aside or deducted from operating income to cover expected or identified loan losses.
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
Receivables Any outstanding debts, current or not, due to be paid to a company in cash.
Risk Management Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.
Shareholder An individual, entity or financial institution that holds shares or stock in an organisation or company.
Short Term Rating See GCR Rating Scales, Symbols and Definitions.
Short Term Current; ordinarily less than one year.

SALIENT POINTS 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.

The credit rating has been disclosed to Lewis Group Limited. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.

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 information received from Lewis Group Limited and other reliable third parties to accord the credit rating included:

  • The audited financial results for March 2019;
  • Four years of comparative audited numbers;
  • Industry presentations;
  • Detailed facility breakdown at June 2019


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