Lewis Group, Vukile Property Fund, Montauk, Renergen
For decades Lewis had a great money-spinning model, offering credit sales to low-income earners and loading their repayments with onerous insurance premiums and fees.
The wheels started coming off when the National Credit Regulator (NCR) focused its attention on what was viewed as the exploitation of vulnerable consumers dependent on credit for big-ticket purchases.
For Lewis the rot really set in when the NCR in July 2015 referred it to the national consumer tribunal. Through its Monarch Insurance business, Lewis was accused, among other things, of selling loss-ofemployment cover as part of credit insurance to pensioners and self-employed consumers.
Insurance was a big moneyspinner for Lewis. In its year to March 2011, for example, Monarch’s premium income of R870m represented 17.9% of total income of R4.86bn, second only to finance income (R908m). That year Monarch’s claims ratio (claims paid as a percentage of premium income) was 23%, compared with Santam’s 63.9%.
In September 2016 the tribunal ordered Lewis to reimburse customers who had been mis-sold loss-of-employment cover. It cost the firm R67.7m in refunds plus a R5m fine.
Then, in February 2017, maximum fees on credit life insurance were published by the department of trade & industry. They came into force in August.
Regulatory pressures and years of exceptionally tough trading conditions devastated Lewis’ profit performance. Its past year was no different, with headline EPS (HEPS) down 24.3% at 303c. It brought to 70% the total fall in HEPS since their R10.08 peak in the year to March 2013. Return on equity in the five years fell from 19.9% to a marginal 4.9%.
Lewis did well in its past year in terms of sales, which rose 9.9% to R2.86bn. The damage was done at the nonsales revenue level, which slid 10% to R2.69bn, leaving total revenue down 0.6% at R5.56bn.
CEO Johan Enslin says the firm experienced lower income in areas such as finance, insurance, services and club fees. “Annuity income [from past years’ credit sales] was also down and will fall by another 2%-4% in the current year.”
There was some good news: Lewis’s dividend, after falling from a peak of 517c in the year to March 2014, was maintained at 200c. This, says Enslin, reflects the board’s confidence.
There are a number of reasons for improved confidence, including a rebound in consumer confidence with Cyril Ramaphosa’s rise to the presidency. Furniture and appliances in particular benefited from this: year-on-year sales in constant price terms were up 11% in April after a rise of 17.6% in March.
Lewis’s sales rose 24% in March, says Enslin.
Another positive was a Western Cape high court ruling that in March set aside an NCR regulation requiring applicants for credit to produce their three latest pay slips. The regulation had meant about 15% of consumers could not access credit.
Lewis is also reducing its reliance on the low-income market. In late 2015 it bought 57 Beares stores from Ellerines. “It took us into the LSM 7-8 market segment,” says Enslin.
In February it bought cash retailer United Furniture Outlets (UFO), which focuses on the LSM 9-10 segment and has 32 stores. “It’s a nice start,” says Enslin. “We intend opening between five and 10 UFO stores this year.”
Enslin does not rule out further bolt-on acquisitions. “We are now in a net ungeared position and have significant unused credit lines,” he says.
Lewis’s share price has been on a wild ride, more than doubling from a record low of R24 in January to a 12-month high of R49 in June, and then sliding almost a third.
On a p:e of 11.1 and a solid 6% dividend yield, Lewis seems to offer fair value, but there are too many uncertainties to make it a “rush out and buy” share.