![Lewis Group Ltd [logo]](../i/logo_lewis.gif "Lewis Group Ltd"){kind=logo}
The overall trading environment has been difficult and it is pleasing to report to shareholders that the group has increased its earnings per share and headline earnings per share by 10.3% and 6.9% respectively. The trading results have been shaped by increases in revenue of 8.2%, maintenance of the quality of the debtors book, control over expenses and solid cash flows.
The board improved dividend cover to 2 with the result that dividends declared for the year totalled 323 cents, reflecting a 21.4% increase over 2007. Our share repurchase programme continued this year with an additional 2.6% of issued shares repurchased. The group will continue to return excess capital to shareholders in terms of its capital management programme.
There has been recent media attention given to a number of revenue recognition practices employed in the furniture retail industry, particularly insurance revenue recognition.
Insurance revenue
Insurance revenue is earned over the period of the customer’s contract.
Monarch provides insurance products to customers purchasing merchandise on credit to cover the outstanding debt and other insurable risks.
Monarch insures 40% of its insurance book with an independent third-party reinsurer with the risk transferring to the reinsurer. Monarch retains a premium reserve of 40% of the ceded premiums which has the effect of deferring reinsurance revenue. As at 31 March 2008, this reserve totalled R101.8 million.
The group accounts for the insurance revenue in terms of its contractual relationship with the parties. Over a 24-month contract, the application of this policy results in 55% of the gross insurance revenue being recognised in the first 12 months of the contract.
The following balance sheet reserves and provisions illustrate our recognition policies regarding deferment of insurance revenue:
| Rm | ||||
| 2008 | 2007 | |||
| Unearned premiums | 290.5 | 214.3 | ||
| Contingency reserve | 41.2 | 32.2 | ||
| Insurance provisions | 32.8 | 26.0 | ||
| Reinsurer’s premium reserve | 101.8 | 75.4 | ||
| 466.3 | 347.9 | |||
The accounting policies relating to insurance and reinsurance revenue have remained unchanged for many years.
Initiation fees
Initiation fees were introduced with the implementation of the National Credit Act (“NCA”). Initiation fee revenue and directly related costs are recognised over the period of the contract on an effective yield basis.
Revenue comprising merchandise sales, finance charges, ancillary services and insurance income, grew by 8.2% to R3 596.4 million (2007: R3 323.5 million).
revenue mix
The revenue mix changed with the introduction of the National Credit Act. Ancillary service income grew by 27.2% with the introduction of initiation and service fees. The 21.4% increase in insurance premiums is due to the earn-out of premiums raised during prior buoyant trading periods and an adjustment to the insurance fee structure. Finance charges grew at a modest rate of 2.3% as a result of the NCA requirement that finance charges cannot be levied on insurance premiums.
Merchandise sales increased by 4.5% to R1 889.7 million. The merchandise gross margin this year has declined slightly as a result of promotional activity to retain customers.
Debtors costs reflected an increase of 28.7% as a result of the tougher collection environment.
Operating expenses, excluding debtor costs, as a percentage of revenue, improved from 33.8% last year to 33.5% this year. The drive for operational efficiency remains a priority in the business. The main trends in the expenditure are as follows:
Operating profit grew by 8.2% to R930.4 million.
Investment income consists mainly of interest and dividend income on listed investments held by Monarch. The investments are long-term and only traded when there is a need to rebalance the portfolio. The increase in investment income is due to realised profits of R22.1 million arising from an investment policy maturing and profit on equities.
Net finance costs increased as a result of higher gearing.
The effective tax rate is currently 32.1%. The tax rate next year is expected to remain stable with the lower corporate rate of 28% offset by the higher STC payments on the improved dividend distribution.
Attributable profit rose by 7.4%. The return on average assets managed was 18.9% (2007: 19%) and the return on average equity 24.4% (2007: 24.8%).
Insurance investments supporting the solvency and technical reserve requirements of the Short-term Insurance Act have remained flat in keeping with our policy to manage capital within our insurance subsidiary.
Inventory levels were at similar levels to prior year. Inventory turn has improved to 5.5 from the 5.2 of last year.
The increase in net debtors can be attributed to the extended credit granted to top-rated existing customers. The provision for doubtful debt percentage has reduced to 13.5% of net debtors (2007: 14.9%), reflecting the continued good health of our debtors book.
Net asset value per share has increased to R30.58 per share, an increase of 10.2% over the prior year. Over the last five years, the net asset value per share has more than doubled from R13.10 per share to its current value.
Operating cash flows during the year have funded the following:
Borrowings have increased by R243 million and gearing is now 23.3% (2006: 15.6%).
The decrease in other reserves reflects the market value of Monarch investments and the realised investment profits.
The reduction in capital results from share repurchases of 2.6% during the year at a cost of R162.4 million.
IFRS 7 and the revised IAS 1 became effective this financial year. There is no impact on the measurement of profitability, but only additional disclosure requirements. These disclosures are largely reflected in notes 26, 27, 28 and 29 to the annual financial statements.
Les Davies
Chief Financial Officer
