Price falls but future looks rosy
Company says there are significant growth opportunities for its technology in Africa and the Middle East
Just what will it take to revive market enthusiasm for EOH?
On the basis of its year-end results released last week, the company is now the cheapest it has yet been, trading on a forward p:e of 9.76 times. Yet the shares closed last Tuesday’s session more than 5% lower after CEO Zunaid Mayet’s maiden annual presentation.
At one point during the day, they dropped as low as R92, prompting a volatility auction on the JSE.
On the surface, results for the period to endjuly looked more than decent: revenue for the year grew 21% to R15.49bn, headline EPS were 16% better at 832c, and the company is still paying dividends. These grew 16% to 215c as cash swelled 29% to R2.5bn.
According to the results, organic growth accounted for 63% of the rise in consolidated revenue, and 68% of its profit before tax.
The company remains acquisitive, however. During the year it bought the Cornastone group of companies, PIA Solar SA and the Syntell group of companies.
But Fairtree Capital’s Jean-pierre Verster says that if you disaggregate the group’s second-half performance from the first, “it looks less good, and if you look at the performance of the business organically versus acquisitively there’s also some concern that the organic growth is slowing down to low single digits”.
Verster reckons EOH needs bigger acquisitions to fuel the “growth engine” of the past, but cautions that these will be harder to come by — particularly as the company’s scrip is now less valuable.
“I’ve mentioned before that EOH is a great business with a great track record, but it was built as a collection of smaller businesses . . . and having a decentralised way of management is great, until you start dealing with big corporates, winning big contracts. Then you need to have not only one brand, but one integrated team. At the moment I think the integration is still lacking, though EOH did refer to it in its own commentary,” says Verster. “So the jury’s still out. If [the company] gets that right, there’s a bright future for it, but it needs to do that first.”
EOH shares have subsequently picked up to trade back above R100/share, but they show little sign of readying for a recovery. They remain 40% lower in the year to date, despite the high expectations that many in the market still have for the former favourite.
Two analysts surveyed by Bloomberg have considerably higher share-price targets than the price at which the company’s shares have languished for months.
Prescient’s Muneer Ahmed has a 12-month price target of R129 on the share, while Avior’s Roelof Brand reckons it could rally to as much as R192.
What it will take to catalyse that jump is anyone’s guess.
FNB Securities analyst Chantal Marx says: “In SA the IT sector is very interesting because it’s super-fragmented. EOH is the largest marketshare holder, but only has 2% market share, so that gives you an idea of what opportunities are still out there.”
EOH says IT services spend in SA is growing at 5.6%/year, against 4.2% internationally.
The company is also managing to push the use of its proprietary software, which has lifted margins. Software sales for the year were 16% higher and margins ticked up to 18.6%.
The company is “printing” money, says Marx. Cash generated by operations surged to R1.4bn in the year, from R917m the year before.
And, says Marx: “Even though organic growth slowed down a little bit, [the company has] managed to supplement it quite healthily with accretive acquisitions, despite the fact that its paper has lost a lot of value.
“Unfortunately that meant it had to put a little more debt on its balance sheet — but at a debt-to-equity ratio of 35%, for a cashgenerative company like this, it still has a lot of headroom to make meaningful acquisitions.”
EOH’S industrial technology division may also be worth watching. The company provides technology in the form of water and energy management, “smart city initiatives” and “intelligent transport solutions”. While it was affected by “long delays” in the awarding of energy-related contracts, the division still grew sales by 30%, to R3.7bn.
If EOH is to be believed, there are “significant growth opportunities” for its technology in Africa and the Middle East, where the company is increasingly eyeing acquisitions.
Marx believes EOH will be able to boost margins as it beds down recent acquisitions. She describes the company’s p:e rating as “crazy” given its expectation that it will grow by 15%-20% over the next five years.