some comments on a value share
I have completed a quarterly report and concluded that large scale optimism in the resources sector is leading to more expensive prices, while large scale pessimism in certain market sectors may just be revealing investment opportunities. A case in point was that while the resource heavy index moved up to a new high, Lewis, which has been under immense pressure gained over 3% on the day.
Lewis Group announced its annual results today. The company has a March year end and in the tough 12 months, managed to increase revenue by 8,2% to R3,6 billion.
Of this R1,88 billion was actual merchandise sales, up just 4,5% from 2007.
The balance of the revenue account comprises finance charges of almost R800m, insurance premiums of R564m and ancillary services of R347m
Operating profit by the same percentage of, i.e. 8,2% and so margins remains intact at 25,9%
Earnings per share increased by 10,3%, with headline earnings up only 6,9% to 689c.
Because these retailers sell mostly on credit, the quality of the debtor’s book is an important aspect for management. The provisions were actually decreased from 14,9% to 13,5%, which is surprising. But they do state that this was due to write off of older debt, which was fully provided for.
Management note that due to centralised credit granting, but in store debt collection policies continues to ensure quality of the debtor’s book.
The debtor’s book on the balance sheet gained 20% to R2,6 billion and so there does appear to be some slow down in collection period. On a gross basis the debtor’s book increased 7%.
Lewis provides some indication of the debtor’s book and from this we can see that various levels of non performing and slow paying customers are up slightly from 2007 as the tougher interest rates start to bite.
The company is turning down more credit applications – some of this increase is probably due to the implementation of the NCA, but also management not wanting to write bad business, just to boost turnover. The credit application decline rate increased from 20,1% to 22,5%.
On this basis then the net asset value of the company is R30,58 up from R27,74. The return on average equity at 24,4% , similar to 2007.
The environment has and continues to be challenging. The results are a reflection of this, with headline ESP up just 7% for the year, yet the share price jumped 3,3% on the day after the release of these numbers.
It’s an indication of the extent to which this share, along with many other retailers was knocked down. At R35,60, the price is trading at 1,1 times book value and an historical PE of just over 5 times.
The dividend paid was a total of 323c. This is slightly behind the consensus forecast of 343c. Still at R35, the price trades on a yield of over 9%.
On a PE relative basis this is now less than 1/3 of the market. This provides a buffer and value investors are looking at this company very closely.
I will be mailing out the Seed quarter report tomorrow. If you have not signed up on the Seed website for regular topical newsletter, please visit the site and sign up for the newsletter. Go to www.seedinvestments.co.za
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