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GCR affirms national scale issuer rating on Lewis at A(za)/A1(za) on strong financial profile - outlook stable
Lewis Group Limited
Incorporated in the Republic of South Africa
Registration number 2004/009817/06
JSE share code: LEW
ISIN: ZAE000058236
Bond Code: LEWI
("Lewis Group" or "Lewis")
GCR AFFIRMS NATIONAL SCALE ISSUER RATING ON LEWIS AT
A(ZA)/a1(ZA) ON STRONG FINANCIAL PROFILE - OUTLOOK STABLE
Lewis Group is pleased to advise that on 4 November 2020
Global Credit Ratings ("GCR") affirmed Lewis Group’s Long-term
national scale Issuer rating at A(za) and Short-term rating at
A1(za); with a Stable Outlook.
The ratings are as follows:
National long-term rating: A(za)'
National short-term rating: A1(za)'
Outlook: Stable
The announcement released by the GCR follows:
"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.
Outlook Statement
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.
Rating Triggers
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.”
Cape Town
5 November 2020
Equity Sponsor:
UBS South Africa (Pty) Ltd
Debt Sponsor:
Absa Bank Limited, acting through its Corporate and Investment
Banking Division
Date: 05-11-2020 08:00:00
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