Lewis Group's R88 share price doesn't add up – good news for Ricardo Portfolio

Lewis Group's furniture and appliance business just delivered a stellar year. Yet the shares still trade on a price-earnings multiple of roughly 5 times. That gap between performance and valuation is exactly what caught our eye for the Ricardo portfolio. Weighing net asset value, earnings power and dividend yield together, I've lifted our adjusted intrinsic value upwards to provide a margin of safety above 30%. A geared Speciality division and new debt are worth watching, but after assessing the just-released annual report, this looks like a rand selling for seventy cents..By Alec Hogg.At every Berkshire Hathaway AGM I attended in Omaha, Warren Buffett returned to the same idea: the market will occasionally offer you a dollar for fifty cents, and your only job is to have the courage to pick it up. That message is what motivated our recent Ricardo portfolio switch from the fully priced Sabvest to a 60c in the Euro Reinet. Lewis Group's freshly filed annual financial statements for the year to 31 March 2026, released on Friday evening, read like exactly that kind of offer. Confirmed the comfort of having the stock in the portfolio. Start with what the furniture and appliance retailer actually delivered in its most recent financial year. Revenue broke through R10bn for the first time, up 11% to R10.3bn. Headline earnings per share jumped 18% to 1,753 cents. Operating profit before impairments climbed 17.6% to R1.38bn.The full-year dividend rose 12% to 897 cents, translating into a cash yield of over 10%. That was split between an interim of 337 cents and the final of 560 cents, paid to shareholders last Monday. None of this is a company in retreat.Yet Lewis shares have spent recent weeks trading around R88 – close to where they sat a year ago, and on a price-earnings basis, far below the rating other JSE-listed retailers command. On headline earnings, that's a multiple of roughly 5 times. For a business compounding earnings at double digits, that valuation only makes sense if the market believes something is badly wrong.Nothing in the numbers supports that fear. Lewis's edge has always been its credit book – furniture sold on terms of up to 36 months to South Africans that mainstream banks won't touch – and that book is the engine, not the risk it looks like from the outside. Effective interest income of R2.38bn and ancillary services of R1.1bn now account for well over a third of group revenue. Crucially, management is provisioning conservatively rather than optimistically: this year's IFRS 9 model weighted a 70% probability to the downside economic scenario, pushing the forward-looking overlay on bad debts up to R595m from R517m. That's a business bracing for a weak consumer, not one hiding a problem. If South Africa's growth even mildly surprises, earnings have room to run further than the market is pricing.The footprint tells the same story of quiet expansion. Lewis now trades from 874 stores across its “Traditional” brands (Lewis, Best Home & Electric, Beares) and 102 more under its Speciality banners (UFO, Real Beds, Bedzone), plus 146 stores in our neighbours Namibia, Botswana, Lesotho and Eswatini. Traditional's operating margin improved to 27.7% from 25.2% – genuinely excellent for a credit retailer.We'd be doing a disservice, though, if we glossed over the two blemishes. Speciality swung to an operating loss of R53.3m after a R72.8m impairment charge, mostly a write-down of store leases and a trademark. Clearly, the segment is still finding its feet. And for the first time in its listed history, Lewis is carrying meaningful long-term debt: R1.4bn, including a R500m note issued under a new Domestic Medium-Term Note programme, pushing the gearing ratio to 40% of equity from 36.6%. This debt is funding growth in the debtors book and store rollout rather than distress, and the group still generated R1.12bn of operating cash flow. But it is a genuine change in character for a company that built its reputation on being ungeared. This change in strategy deserves watching rather than ignoring.So what is Lewis actually worth? I’ve had a number of requests for more explanation on the Intrinsic Value which we carry in the Ricardo portfolios. On the back of these results, we’ve adjusted our number for Lewis from 120c to 130c. Here’s why. Applying a conservative 8 to 9 times multiple to headline earnings, reflecting the quality of the franchise but discounted for SA macro risk, produces a fair value of R140 to R158. I’ve cross-checked against the dividend – 897 cents at a required yield of around 9%, appropriate for a small, geared SA retailer – gives a figure of near R100. Blending these approaches gives an adjusted intrinsic value in the region of R130 to R150 a share. Buffett famously said you don’t need to know whether a fellow entering the room is 32o pounds or 300 pounds to know he is fat.Taking the bottom end of our blended Intrinsic Value number - 130c - translates into a margin of safety of over 30% at the current share price. Reflective of the current depressed state of the JSE. Overlay that with Lewis’s own net asset value figure of R106 per share – comfortably above the current price. One glance at our portfolio spreadsheet shows that with Lewis you’re getting a Rand in value for seventy cents. Add the fact that you’re getting growing annual dividends now yielding over 10% on the current share price. Beats a savings account any day, doesn’t it?.Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. Register here.Support South Africa’s bastion of independent journalism, offering balanced insights on investments, business, and the political economy, by joining BizNews Premium. 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Lewis Group's R88 share price doesn't add up – good news for Ricardo Portfolio

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