Johannesburg, 24 August 2021 – GCR Ratings (“GCR”) has affirmed Lewis Group Limited’s (“Lewis” or “the group”) long term and short term national scale issuer ratings of A(ZA) and A1(ZA) respectively. The Outlook has been revised to Positive, from Stable previously.
|Rated Entity||Rating class||Rating scale||Rating||Outlook / Watch|
|Lewis Group Limited (“Lewis”)||Long Term Issuer||National||A(ZA)||Positive Outlook|
|Short Term Issuer||National||A1(ZA)|
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 COVID-19 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.
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.
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.
|Primary analyst||Tinashe Mujuru||Credit Analyst: Corporate Ratings|
|Johannesburg, ZA||TinasheM@GCRratings.com||+27 11 784 1771|
|Committee chair||Sheri Morgan||Senior Analyst: Corporate Ratings|
|Johannesburg, ZA||Morgan@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 Rating Scales Symbols and Definitions, May 2019|
|GCR’s Country Risk Score report, published August 2021|
|GCR’s SA Corporate Sector Risk Score report, published April 2021|
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||Nov 2020|
|Short Term Issuer||National||A1(ZA)|
Risk Score Summary
|Rating components & factors||Risk scores|
|Management & governance||0.00|
|Leverage and cash flow||1.75|
|Total Risk Score||13.75|
|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 2021 (plus four years of comparative, audited financials)
- Covenant compliance certificates at March 2021
- The March 2021 integrated report
- Capex budgets
- Funding profile at June 2021
- FY21 results presentation