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 “the Company”)

GCR UPGRADES LEWIS GROUP LIMITED’S RATING TO A+(ZA) ON CONTINUED
STRONG PERFORMANCE AND LOW DEBT BURDEN

Lewis Group is pleased to advise that on 30 August 2022 Global Credit Ratings
("GCR") upgraded Lewis Group’s Long-term national scale Issuer rating from A(za) to
A+(za) and the Short-term national scale Issuer rating affirmed at A1(za). 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 follows:

The rating upgrade acknowledges Lewis’ sustained strong sales performance and
increasing profitability coming out of the pandemic, as well as its conservative financial
profile and ample financial flexibility.

The improvement in GCR’s assessment of Lewis’ earning profile derives from the
strong performance in FY21 and FY22, with robust revenues and EBITDA reported
despite the effects of the pandemic. The sustained strong results demonstrate the
success of initiatives to adjust group revenue, following changes in various credit
legislature during 2015-2017. Revenues grew by a robust 7.9% in FY22 (FY21: 4.2%)
supported by solid demand for major household goods, whilst the operating margin
(GCR calculated) remained strong at 9.2% (FY21: 10.3%). GCR expects Lewis’
operating margin to continue trending upwards in the 10%-15% range due to the
strong base of operations, improved sales mix associated to better inventory
efficiencies, as well as good expense management efforts. Debtors’ collection remains
very healthy, with debtors’ costs as a percentage of gross debtors moderating to
12.3% (FY21: 14.3%), outperforming communicated targets of 13%-16%. However,
we expect the inflationary environment to result in greater pressure on consumer
disposable income over the rating horizon, particularly if interest rates rise more rapidly
than anticipated.

Lewis benefits from strong brand awareness, supported by its value product
positioning and extensive store network (819 at stores at FY22 with 16 additional
openings planned for FY23). Specifically, the group is well placed in the low and
middle-low consumer segments, where its brand assortment and affordable prices will
likely remain appealing though weak economic cycles. The consumer finance division
further strengthens its retail operations, underpinned by robust loan origination and
credit underwriting practices, which help mitigate asset quality risks. Whilst Lewis has
diversified somewhat into the higher-income segment and cash sales, the ratings
remain constrained by its relatively small size and narrow sales concentration in the
highly fragmented home goods space 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.

The group’s leverage and capital structure profile strongly support the ratings. Interest-
bearing debt has been kept at minimal levels over the review period, with the main
financial obligations being store leases (R950m of R1bn in gross debt at FY22). Debt
utilisation largely reflects working capital demands during peak trading periods.
Including lease liabilities, net debt to EBITDA equated to 0.7x (FY21: 0.4x), with
operating cash flow to total debt reported at 68% (FY21: 100%). Interest cover is also
expected to remain strong, trending in the 15x-20x range, as utilisation of the group's
credit facilities are expected to remain immaterial. Overall, Lewis is expected to
continue to fund growth and shareholder returns with a mix of free cash flow and
shorter term debt issuances, as it maintains its stated target net debt to equity leverage
of below 25%.

Lewis’ excellent liquidity profile is exemplified by its strong expected free cash flow
generation and R250m available under revolving committed credit facilitates and a
further R700m available under call accounts. With minimal financial obligations,
available cash flows will be applied to dividends, to fund the ongoing share buy-back
programme and modest annual expansionary capex (generally around R100m). Thus,
GCR’s 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. The group’s
ample financial flexibility is further supported by strong banking relationships and good
access to domestic capital markets.

Outlook Statement

The Stable outlook reflects GCR’s expectation that Lewis will continue to achieve
healthy sales and strong profitability levels, supported by its well-established brand
and expansion of its sales network, and that its financial strategy will remain
conservative.

Rating Triggers

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.

Cape Town
30 August 2022

Sponsor: The Standard Bank of South Africa Limited

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