Financial Mail - Investors Monthly - - Contents - Stafford Thomas

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.

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