EOH shares surge as restructuring takes form

16th April 2019 By: Schalk Burger - Creamer Media Senior Contributing Editor

JSE-listed information and communication technology (ICT) service provider EOH’s share price rose by 55.76% on Tuesday as the company reported its financial results for the six months ended January 31.

The company reported a loss for the six months of R3.3-billion mainly owing to one-off costs and impairments, while revenue stayed steady at R8.19-billion.

CEO Stephen van Coller detailed to investors and analysts the work he and his team have done to turn the company around, noting that there was good value in some of the group’s businesses and that they could grow more effectively and freely within the new capital structures arising from the completed strategic review.

He said there were significant new processes in place to ensure financial, legal and management oversight and control over operations, which included establishing an internal audit department, adherence to International Standards Organisation 37001 antibribery standards, and compliance with King IV, the Companies Act and international reporting standards.

Law firm ENS Africa and EOH’s forensic team had found five contracts that were believed to be tainted by malpractice and had identified various patterns in the way these contracts were executed that allowed them to inspect other contracts associated with the relevant people or processes for fraud or malpractice, he explained.

EOH would make the results of the investigation public after it concludes on May 31.

However, Van Coller enthused about the feedback he and his team were getting from clients, who supported EOH’s approach to mitigating the reputational impacts by meeting with clients and assuaging their concerns, as well as EOH’s staff whom he said were dedicated to the group’s clients.

Further, he pointed out that some of the intellectual property (IP) businesses were achieving 21% profit margins, but were constrained by the generalised capital structure of the centralised group.

If they are given the correct capital structure, they could grow into larger businesses and into new markets, he said.

CFO Megan Pydigadu, meanwhile, highlighted that the IP businesses had grown by about 15% a year.

EOH’s earnings before interest, taxes, depreciation and amortisation (Ebitda) for the half-year stood at R387-million, down from R1.09-billion reported for the prior year’s interim period.

The losses it posted were mainly as a result of one-off impairments and write-offs of R1.87-billion.

The company was discontinuing its large public sector enterprise resource planning implementations and its electrical and water infrastructure projects, which were not progressing sufficiently well.

The company would also dispose of noncore businesses over time, including the Middle East and Africa enterprise resource planning business, some of the business process outsourcing operations and industry technology related to certain infrastructure projects, she said.

Van Coller pointed to the 35-year-old construction software CCS business, which is part of the IP businesses, which has about 40 000 users and derives 40% of its revenue from outside South Africa. With the correct capital structure and partners, it could expand internationally and its revenue is largely annuity based.

“There are jewels in EOH, but everything was all in one pot. We can align their financials and focus them to lift their value.”

He illustrated the benefits of the restructuring strategy with a slide that compared the achieved  interim results with those of the proposed restructured group. The restructured group was projected to achieve revenue of about R6.5-billion, but would achieve an Ebitda of about R600-million, or about 35% higher than the current business.

“Given how we can leverage our knowledge and available capabilities to build new services and platforms, including digital economy platforms, there is reason to be excited. Further, with prudent capital structures and management, we can again become a consolidator in the South African ICT sector, buying smaller businesses and helping them to scale,” Van Coller said.

EOH’s share price rose to a high of R20.25, but was trading at R18.63 by 15:00 on Tuesday – an increase of 43.31% on Monday’s close of R13 a share.