Lewis group credit ratings and outlook affirmed

Johannesburg - Lewis Group [JSE:LEW] advised on Tuesday that Global Credit Ratings (GCR) affirmed the group's credit ratings and outlook on September 5 2016.

The ratings are as follows: National long-term rating: A(za); national short-term rating: A1(za); outlook: stable.

The announcement released by GCR states the following:

The credit ratings given to Lewis Group are based on the following key criteria: The ratings take cognisance of Lewis' market position as a leading domestic household goods credit retailer to the lower income market, supported by its significant store network from the large urban areas to small rural towns.

The group's growing geographic footprint outside of South Africa is also positively considered.

Nonetheless, changes to domestic credit laws, exacerbated by a high degree of consumer financial strain - being particularly pronounced in Lewis' core target segment - has restricted the group's revenue growth of late. Overall, group revenue rose by a mere 2% to R5.8bn in F16, on the back of the Beares chain acquisition concluded in late F15.

Favourable shifts in product mix, particularly in the second half, drove a strengthening in the gross margin for the year, although once-off expenses to integrate Beares, as well as higher debtors costs saw the operating margin shrink for the third consecutive year to a review period low of 14% in F16 (F15: 19%).

While competitive pressures have eased, the weak economic outlook and tighter regulations on credit sales will continue to weigh on short term prospects, with forecasts for F17 revised downwards (or to remain flat). Medium to longer term margin support could stem from synergies from Beares and the enlarged Africa portfolio once the assets are fully bedded down.

Cognisance is taken of pending legal disputes which could have potential negative financial and longer-term reputational ramifications. Lewis' consumer credit operations finance broadly two third of sales. The gross receivables portfolio grew by a moderate 4% to total R6.5bn at FYE16, while impairments and bad debts grew by a significantly faster 18% and 10% respectively, indicating the challenging consumer lending environment.

While the cyclical deterioration in asset-quality metrics is expected to persist, such risks are likely to remain manageable for Lewis in view of its strengthened credit controls.

Lewis continues to reflect a conservative financial risk profile, despite the uptick in debt levels to fund recent acquisitions. Specifically, net gearing was moderate at 26% at FYE16, while net debt to EBITDA remained low at around 1.5x. Despite tempered earnings growth, continued strong cash generation is expected to be sufficient to fund Lewis' operational and moderate capex requirements in F17, with any excess to be used to pay down borrowings.

Liquidity is also supported by a comfortable debt maturity profile and sizeable committed facilities. Upward rating movement would be considered if the group successfully integrates the new acquisitions that lead to sustained improvement in trading and margins over the medium term.

Furthermore, upside potential would only likely materialise on the back of notable improvements in the operating environment, and in particular consumer health.

Downside rating pressure could arise if economic conditions and emerging regulatory risks caused operating performance to deteriorate significantly beyond expectations. Further, any material adverse findings in respect of the legal disputes could potentially affect the ratings."


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