EOH leaps on asset sales
Firm to consolidate 200 businesses into three divisions
Technology services group EOH’s share price jumped as much as 55% on Tuesday, the best level in six weeks, after it said it would raise R1bn through asset sales to reduce debt.
As the market cheered, analysts cautioned that they would be watching the scandal-tainted company’s ability to grow and execute a turnaround plan.
The company, once a titan in SA’s information and communications technology (ICT) sector, has been plagued by concern about governance and allegations of corruption in recent years. Under new CEO Stephen van Coller, it has been looking into past bids for government contracts, one of which was said to have cost the company its partnership with Microsoft.
Mark du Toit, investment manager at Courtney Capital, said: “What they [EOH] are going to need to demonstrate is that the business can grow organically without acquisitions.
“The big test is whether the businesses they have and hold on to can generate growth,” he said.
The company plans to consolidate its more than 200 businesses into three operating divisions: the traditional ICT services business, specialised solutions company Nextec and its software development arm.
Van Coller told Business Day he was pleased with the positive response from stakeholders to the turnaround plan.
“Our customers — financial institutions, large corporates and state-owned enterprises alike — understand that things go wrong in business. All they want to know is that management is doing the right things to (sort) the situation out.”
Du Toit said Van Coller was able to “articulate a very clear plan moving forward”, and had given clarity on what the business would look like in future,
which was good for confidence. With what appears to be a strong management team in place, Du Toit said it was good to see measures such as centralised debtors collection and group procurement, which had not been there in the past, being put in place, as other large companies in the country had done.
EOH said on Tuesday it had impaired the value of certain assets by R1.7bn. Its net asset value fell 39% to R4.6bn.
“If you look at where the share price is sitting, the market had already written off that value ahead of the numbers coming out,” Du Toit said, explaining the relationship between the company’s market capitalisation and asset value.
“The challenge will be realising good returns for the business and assets that they exit,” he said.
The group said that it expected lower future earnings, which meant it needed to cut debt, mainly by selling noncore assets.
Eight assets were up for sale and the company had already received binding offers for two of them, Van Coller said. Du Toit said EOH expected the sales to bring in R1bn over the next three to 12 months.
“They will realise a billion rand, but it’s not going to be a billion rand of profit,” Du Toit said.
New group finance chief Megan Pydigadu said the company aimed to use the proceeds to reduce its debt-toearnings ratio.
Aside from asset sales, EOH planned to “release” R1bn in cash from debtors, Pydigadu said.
The company, which had liabilities of R7.5bn at the end of January, reported an interim loss of R3.3bn, from a R70.9m profit a year before. While revenue was flat at R8.4bn, profits were dented by write-downs and slimmer margins.
“These last six months, including events post-period end, have been extremely challenging for the group,” EOH said.
“In addition to difficult trading conditions, EOH has been the subject of ongoing governance allegations, compounded by Microsoft cancelling its channel partner agreement.
“This has accelerated shareholder value destruction and raised further questions about historic governance practices,” the company said.
Van Coller maintains the Microsoft issue has had little effect on their finances. The real damage has been reputational. He did admit having been blindsided by the issue.
“The problem with Microsoft is I wasn’t expecting it. It came out of the blue.”
Law firm ENSafrica’s investigation of the historic bids for state work was expected to be wrapped up by the end of May, Van Coller said.
He said two criminal cases had already been opened, and the company was looking into five potentially irregular bids.
EOH had also identified operations it planned to shut down, including the project and electrical infrastructure units in the Nextec division, which mainly operate in the water industry.