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”; “Lewis”; the “group”; or “the Company”)

GCR AFFIRMS LEWIS GROUP LIMITED’S NATIONAL SCALE ISSUER RATING OF
A+(ZA); OUTLOOK STABLE

Lewis Group is pleased to advise that on 17 August 2023 Global Credit Ratings
("GCR") affirmed Lewis Group Limited’s long and short term national scale issuer
ratings at A+(za) and A1(za) respectively. The Outlook is Stable.

The ratings are as follows:
National long-term issuer rating: A+(za)
National short-term issuer rating: A1(za)
Outlook: Stable

The announcement released by the GCR is as follows:

Lewis Group Limited’s (Lewis or the group) ratings reflect its continued expansion
strategy and operating resilience even in weaker macroeconomics conditions. The
strength of the group’s financial position and its financial flexibility is expected to
comfortably absorb pressures of its growing credit book.

Lewis benefits from a strong franchise, underpinned by its well-established traditional
brand assortment and extensive store network that is in close proximity to high density
urban and rural hubs. The group plans to add 25 new stores to its large 840 store base
during financial year 2024, ending March. Lewis holds particularly strong market share
in the lower LSM consumer segments, where its value positioning in consumer durable
products and consumer finance division remain appealing even though weak
economic cycles. Merchandise sales account for around 59% of overall revenues,
followed by 30% from the financial services division (including optional microinsurance
products). Whilst Lewis has diversified somewhat into the higher-income segment and
cash sales through the UFO brand format, the ratings remain constrained by its
relatively smaller size and narrow sales concentration compared with broader retail
peers in a highly competitive market and the inherent cyclicality of discretionary
consumer spending. The group also has limited geographic breadth and is vulnerable
to developments in local credit regulations and the credit cycle.

Due to softening consumer spending, the group evidenced slower sales growth in
financial year 2023, ending 31 March (financial 2023) from the very strong levels
evidenced in financial 2021 and financial 2022. Whilst GCR expects sales growth to
remain subdued in the near term, the interest revenue upside from higher credit sales
and interest rates should help sustain revenues higher than pre-pandemic levels. We
also expect the operating margin to remain resilient, as lower logistical costs have
been secured and debtors performance remains well controlled. Whilst the operating
margin (GCR calculated) eased to 8% in financial 2023 from 9.2% in financial 2022
(financial 2021: 10.3%) we believe this will trend upwards towards 10%-15% over the
medium term as volumes recover as inflation normalises. The rating also positively
factors in the group’s solid track record in credit performance even in weaker
macroeconomics conditions, underpinned by robust credit underwriting practices
which help mitigate asset quality risks. Debtors’ collection remains very healthy, with
collection rates registering at record levels of 80.8% (financial 2022: 79%) and debtors’
costs as a percentage of gross debtors stable at 12.3%, well within communicated
targets of 12%-15%.

The ratings continue to be supported by the group's commitment to maintain a
conservative capital structure, with net debt to EBITDA including lease liabilities at
1.1x at financial 2023. Although the main financial obligations are store rental leases
(ZAR945 million of ZAR1.3 billion in gross debt in financial 2023), the utilisation of
interest-bearing debt largely reflects working capital demands as the credit book
grows. Based on our view of lower trading volumes and higher credit sales, we expect
incrementally higher debt levels to fund growth. Thus, we estimate operating cash flow
to total debt to remain softer at 30-40%, with net Interest cover still strong in 8x-12x
range (financial 2023: 10x).

At end-March 2023, Lewis’ liquidity was strong with ZAR183 million of cash, ZAR250
million available under revolving committed credit facilitates and a further ZAR332
million available under call accounts against minimal debt obligations of ZAR368
million. Continued strong free cash flow generation is expected and given modest
annual expansionary capex (generally around R100m), excess cash could be used for
dividends and to fund the ongoing share buy-back programme. To manage liquidity,
Lewis is looking to upsize its committed facilities in the new financial year,
demonstrating its solid access to local funding.

Outlook statement

The Stable outlook reflects GCR’s expectation that Lewis will be able to maintain its
strong financial profile, including its modest leverage, despite the temporary trading
weakness consistent with current macroeconomic conditions.

Rating triggers

Rating upside is limited and would require sustained improvements in economic
conditions in South Africa, as evidenced by a higher assessment of the operating
environment. Over the longer term, positive rating action could result from consistently
strong operating momentum, with the operating margin exceeding current medium-
term expectations, or an improvement in scale and diversification. Credit metrics would
also have to be maintained at very strong levels.

A downgrade could follow a significant deterioration in revenue and profitability, which
could stem from a more challenging operating environment and weakening debtors’
book. If financial policy turns more aggressive through business growth and/or
shareholder returns, or if liquidity weakens, this could also place pressure on the
ratings.
The information contained in this announcement has not been reviewed or reported
on by the Company’s external auditors.


Cape Town
23 August 2023
Sponsor: The Standard Bank of South Africa Limited

Debt Sponsor: Absa Bank Limited, acting through its Corporate and Investment
Banking Division