Key message: Revenue growth in line with FY22E forecasts. Debtor costs improve considerably. No changes to HEPS outlook.

  • Lewis announced a strong trading update for the nine months to December 2021 – merchandise sales grew by 12.7% compared to the same period the prior year. Comparable stores sales grew by 10.3%. Black Friday sales remained robust, supporting 3Q sales growth of 3.6% on the comparative period. 3Q21 saw abnormally strong Black Friday sales following lockdown (+16.6%), therefore growth of 3.6% off this base is impressive. 3Q22 sales were up 20.7% on 3Q20. Sales growth is currently running ahead of our 10.3% forecast for FY22E.
  • Credit sales are recovering strongly (+16%) as anticipated given the higher level of cash transacting during COVID-19 in the prior year when consumer liquidity was boosted. Growth is broadly in line with our 15% growth in FY22E.
  • Other revenue (finance income, insurance income and ancillary services) achieved modest growth of 1.3% for the nine months. This is below our growth estimate of 4.6% for FY22E. We do, however, anticipate a growth recovery in 4Q following stronger credit sales and the repo rate hike in November 2021 (and potentially later today).
  • Total revenue has grown 8% in the nine months which is in line with our FY22E forecast.
  • The quality of the debtors book continues to improve, as envisaged. Debtor costs are down 20.5% for the nine-month period. We are forecasting an 18% decline for FY22E. Collection rates rose to 79.7% in 3Q22 (75.6% in 3Q21).
  • With the trends broadly in line with our FY22E estimates, we see no reason to amend our earnings forecast for FY22E. A greater decline in debtors costs provides some comfort. 4Q is a slower revenue period for Lewis, certainly compared to 3Q.
  • 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 (to date R68.6m of claims has been received from a total of R78.8m). Post the buyback it translates into HEPS growth of 24% and 23%. This puts the stock on an attractive 16-month forward PE of 5x. We value the stock on a DFCF basis, deriving a fair value range of R65.68 to R72.75.