• Lewis Group has undergone significant positive change in six years as it transforms back to a retail revenue driven business, instead of financial services. Of its revenue earned in FY14, we estimate 58% was from financial services – in FY21 its 45%. Credit sales now accounts for 50.6% of total sales, compared to 72% in FY14.
  • Its acquisition of Beares in FY15 and UFO in FY18, as part of management’s diversification strategy, expanded its target market to higher income segments whilst reducing its ratio of credit sales. Club subscriptions have been terminated, ancillary services are more transparent and optional. As a further protection to customers, a centralised call centre now engages with all customers before a store finalises a credit transaction. These reforms have addressed certain legacy issues.
  • The retail business model has remained consistent, with the stores driving sales, deliveries and collections. Sales are being enhanced with an online channel (currently 5% of sales) which is gaining momentum and collections are moving swiftly towards debit orders (25% of collections) which is positively impacting arrears.
  • Debtors management has improved significantly since FY17 with arrears declining 5%, total provision coverage rising from 28% to 42% (resulting from the IFRS9 implementation in FY19), provision coverage of non-performing accounts at 88% from 73% and our debtors charge forecast of 11.2% in FY22E compared to 19%. Arrears remain stubbornly high at 37%, a reflection of the credit risk in its target market. The number of satisfactory paid accounts is rising (75.2% from 68.4% in FY17), good for repeat business which is circa 45% of credit sales.
  • The group has no debt, apart from financial lease obligations. Operating cash flow post interest and tax was R808m in FY21 (1H22 R532m). This has facilitated a strong dividend payout as well as an aggressive share buyback programme since FY18. Its dividend payout ratio has remained above 50% since FY08 (55% in FY22E). To date it has acquired and cancelled a third of its shares in issue – in FY22E it has already acquired 6m shares, approximately R215m in value. This combined with the 1H22 dividend, equates to an estimated 12% return to shareholders in FY22E to date. The stock is on a forward 9.1% dividend yield.
  • We anticipate modest headline earnings growth of 6% and 11% in FY22E and FY23E impacted by a low repo rate, a depressed cost base in FY21 and store interruptions due to COVID-19 and civil unrest. Post the buyback it translates into HEPS growth of 24% and 23%. This puts the stock on an attractive 18-month forward PE of 4.9x. We value the stock on a DFCF basis, deriving a fair value range of R65.68 to R72.75.