EOH nears its lowest level since 2004
In a selling frenzy that cast a shadow over EOH’s recovery plan, shares in the troubled technology group have slumped by more than three-quarters so far this year to levels last seen more than 15 years ago.
EOH, which has its stock hovering at levels last seen in 2004, is in the middle of cleaning up its balance sheet following allegations of underhanded dealings with the government, forcing the company into taking billions of rand in writedown charges and losing nearly R1bn,
But it seems investors might no longer be convinced by the strategy of EOH’s CEO Stephen van Coller, who has mapped out a turnaround plan that includes the sale of assets to pay down debt and improving corporate governance standards.
The company’s share price
closed 1.45% higher at R3.50 on Wednesday, but it is still down more than 70% so far in 2020, giving it a market capitalisation of about R600m. The stock fetched as much as R178 about three years ago.
“This selling may be as a result of the ongoing concerns around the group’s history of corporate governance, as well as whether the group’s long-term trajectory of profitability is at stake due to a large portion of revenues being derived from the public sector, which has been under pressure to cut costs,” said Lester Davids, a trading desk analyst at Unum Capital.
As part of clean-up efforts, Van Coller has said EOH Mthombo, the business unit implicated in fraud and which was primarily responsible for securing public-sector contracts, would be closed down.
EOH Mthombo accounts for 18% of the company’s nearly R12bn revenue.
Irnest Kaplan, of Kaplan Equity Analysts, said the fears around EOH’s “large debt”, alongside general sentiment around small-cap stocks, or those whose market value is less than R1bn, could be behind the slide in the company’s shares.
EOH is sitting on a R3.1bn debt pile, more than five times its market capitalisation.
In 2019, it beat its own target of raising R1bn from the sale of assets with the disposal of Dental Information Systems, a health-care technology group based in Cape Town, for R250m to AfroCentric.
But even with all these efforts in place, the market does not seem convinced. “Until we see some concrete evidence that the group has stabilised in terms of profitability and clarity on corporate governance, we may continue to see selling pressure on the share price,” Davids said.
The scale of the corporate fraud at the company was revealed in an investigation by ENSafrica, which found close to R1bn in underhanded dealings with its government client, including transactions worth more than R600m with no evidence of valid contracts being in place, or for which no work was done, as well as R90m of loans written off and overbilling of about R180m.
The investigation has resulted in up to 46 people being reported to authorities. Of these, 16 employees at EOH were implicated directly in the wrongdoing together with 12 government employees.
“We are aware and concerned about the recent value destruction to our shareholders, however, it is difficult for us to comment on speculation potentially driving the share price,” EOH said on Wednesday.
“Futhermore, we are currently in a closed period as we prepare for our interim results to be released on 7 April 2020 and therefore are restricted in terms of our engagements with the market.”