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EOH aims to raise R600m in equity to reduce debt costs

27th October 2022

By: Schalk Burger

Creamer Media Senior Deputy Editor

     

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JSE-listed information and communications technology company EOH will seek the approval of its shareholders for a R600-million equity raise to reduce its debt financing costs by about 15%, EOH Group CEO Stephen van Coller said on October 27 during a presentation of the group’s financial results for the year ended July 31.

A successful capital raise presents the potential to achieve a 5% increase in EOH's profit-after-tax margin through the creation of a sustainable capital structure and improve earnings through a lower interest burden.

EOH's blended cost of debt increased by 230 basis points over the financial year under review and, with a normalised capital structure, it would expect to see the margin it pays on its Johannesburg Interbank Average Rate decrease by between 200 and 300 basis points.

"Further, rightsizing the capital structure will allow EOH to pursue a growth strategy, immediately improve earnings and ultimately lead to a value unlock for shareholders. The final resolution of the capital structure, therefore, remains a business imperative, particularly in the context of the current rising interest rate environment," Van Coller noted.

EOH is confident in pursuing the capital raise because the year was a turning point for it, as it had closed out major disposals and could focus on the future of the business from this point, said EOH CFO Megan Pydigadu.

The group achieved revenue of R6.03-billion, which is lower than the R6.47-billion in the 2021 financial year, but gross profit increased to R1.69-billion, compared with R1.68-billion in the prior financial year, improving its gross profit margin to 28% from 26%.

Revenue from continuing operations had stablised and was starting to grow. The theme of continuous improvement played out in the 92% improvement in the total operating profit to R100-million, up from R55-million in the previous year, improving the margin to 2% from 1%, she said during a presentation of the company's results.

"The cost of interest continues to burden the business and contributed to EOH posting a loss from continuing operations of R160-million, albeit a lower loss than the R307-million loss in the prior year," she highlighted.

EOH’s headline loss a share narrowed to 72c in the financial year under review, compared with a headline loss a share of 98c in the prior financial year.

"In terms of the forward view, this is the end of disposals and a clearer picture is emerging on the sustainability of the business and the revenue going forward. Digital services subsidiary iOCO is expected to contribute 70% of overall revenue.

“With the removal of legacy contracts and the exiting of low-margin contracts, iOCO has delivered revenue growth of 4%, and helped us to improve our gross profit margin," stated Pydigadu.

Meanwhile, EOH had also reduced its debt to R1.23-billion from R2-billion in the 2021 financial year. It had refinanced its facility with its lenders' consortium, which brought significant stability to its capital structure, but at a high cost, as the bridge facility was an expensive format of debt, she noted.

EOH expected to finalise its capital restructure by early 2023, which would set it up to accelerate its growth-led strategy. It would continue focusing on driving revenue growth at good margins primarily through its iOCO Digital business, its international expansion and its Infrastructure Services business, Van Coller said.

With the correct capital structure, EOH anticipated that it could achieve revenue of R5.96-billion a year; earnings before interest, taxes, depreciation and amortisation of R483-million at a margin of 8%; and net profit of R112-million at a margin of 2%, he added.

"EOH is now a well-balanced and sustainable business with solid foundations to drive future growth. We are expanding geographically into East and West Africa and are excited to be investing in growth, especially in the UK and the Middle East," Van Coller said.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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