GCR accords Lewis a first-time rating of A

GCR head of corporate sector said on Wednesday, 2 October 2013, that although smaller than its competitors‚ Lewis' focus on strong customer relationships had seen it outperform the industry in terms of sales and bad debt experience.

"In this regard‚ Lewis has demonstrated a consistent track record of operating profit growth through both strong and weak economic environments since 2001‚" Shevel said.

Shevel said GCR noticed that revenue had increased to 7% to R5‚2bn in the 2013 financial year‚ but operating profit had risen by a slightly firmer 10% to R1.2bn‚ due to an increase in credit sales and longer term contracts.

"As a result‚ the operating profit margin edged up to a 5-year period high 24% in F13‚ at the top end of management's targets. As debtors form the group's largest risk exposure‚ granting credit is managed centrally using advanced risk and behavioural scorecards‚ as well as a complete affordability assessment‚" said Shevel.

Furthermore‚ he said the strict enforcement of policies had seen the number of credit applications rejected rise in the current economic climate.

"Thus‚ despite the robust growth in credit sales in F13‚ both the impairment provision (17.4%) and the debtors cost ratio (9.4%) declined‚ and were below management's target level."

While debt had doubled to R1.5bn over the review period‚ Shevel explained that this had been countered by substantial retained earnings‚ low gearing of 29.9% at FYE13 (FYE12: 23.3%).

"Net debt to ebitda has crept up above 100%‚ but debt is covered more than 3x by the debtors book. This implies that were growth to slow‚ substantial cash would be generated from collections and available to repay debt. With net interest coverage above 10x‚ liquidity thus appears sound."

Shevel said Lewis' rating took cognisance of its strong track record‚ and expectations that growth would continue.

"Thus‚ upwards rating migration is only likely over the medium to long term‚ if revenue and operating growth persist."

He said a sustained improvement in demand for durable goods‚ and lessening of the general debt burden faced by consumers would also be positive.

"Conversely‚ an adverse change to the regulatory environment that significantly impacts finance and/or insurance income would lead to negative rating pressure."

Shevel concluded by saying such risks were considered in light of the increased regulatory scrutiny all lending to the lower LSM segments had come under.

"In addition‚ a further worsening of the credit retail environment could affect both top line growth and lead to higher bad debt costs."