EOH: the big shrink continues
The former IT darling might be a radically smaller version of itself, but it’s profitable and finally winning new deals
ý Technology group EOH continues to shrink, but the IT services group is finally back in profit.
Still, the company has a stubborn pile of debt to shift — R1.8bn according to its latest results — and the sale of “good” assets means the jury’s still out as to its growth prospects after three harrowing years of a clean-up under CEO Stephen van Coller.
But some confidence seems to have been restored with clients: EOH recently signed a R204m three-year contract with a large telecoms operator for contact centre automation, as well as a R375m analytics project, also for three years.
Van Coller says the contract wins are “particularly” pleasing because “it really shows that we’re back in the mix”.
He says: “If you remember, about a year and a half ago I spoke about how these contracts had dried up as people wanted to see what we were doing about the bribery and corruption and the turnaround of the business.
“As we’ve got that credibility back, the pendulum has hopefully swung the other way and we’re seeing lots of big businesses now contracting with us for the long term, using our skills.”
EOH was, at its peak, home to 272 entities and operations, thanks to years of an acquisitive binge that ended as rumours of corrupt public sector deals filtered through to the public, beginning a rout in its share price in 2017. The allegations led to a purge of executives, most notably founder Asher Bohbot, his successor, Zunaid Mayet and one-time CFO John King.
A 2019 ENSafrica probe found R1.2bn worth of suspicious transactions, mostly involving public sector contracts, which ensnared the group in the state capture project and cost it a lucrative licence to resell Microsoft software.
Peter Takaendesa, head of equities at Mergence Investment Managers, says EOH’s interim results show “good signs that the stabilisation [of EOH] has been done”, though it’s “unfortunate” that “they’ve had to get rid of good assets” along the way.
An example of this is the recent sale of Construction Computer Software (CCS), which provides cost and enterprise software solutions for the construction and engineering industries, for about R890m.
At the time, Irnest Kaplan of Kaplan Equity Analysts said CCS did not fit the description of a noncore, peripheral asset as it had good clients and was profitable.
EOH is also offloading its two largest intellectual property businesses, Sybrin and Information Services. Once the deals go through, says CFO Megan Pydigadu, the company will be able to pay down debt from operations as it grows earnings and attracts new business.
Besides the internal clean-up, Van Coller has overhauled the company’s operational structure, consolidating it into three business units.
It’s one reason the group is set to slash over 10,000m² — the equivalent of three
Pick n Pay stores — from its property portfolio in the coming months.
Because Covid and social distancing have forced many office workers to work at home, corporates around SA have had to shoulder large rental bills for buildings and campuses that more closely resemble empty mausoleums than bustling offices.
For EOH, that trend has presented an opportunity to renegotiate lease agreements and, in many cases, to exit buildings it no longer needs, says Pydigadu.
Over the past year it has built “hubs” in Gillooly’s, Sandton and Midrand for staff who require specific tools for work or meetings. Pydigadu says these hubs will be used by staff who need to go to the office, though assigned seating is now a thing of the past.
While it’s all part of the Covid zeitgeist, EOH also simply can’t afford unnecessary expenses.
And while globally the trend is for technology companies to scale up their businesses to drive earnings, the Joburg firm has taken the opposite approach to achieve profitability. In the six months to January 2021 alone, it shed 1,566 jobs across the enterprise. Half the cuts were the result of selling businesses. The rest came as a result of not renewing contracts or of business closures and retrenchments.
EOH managed to slice R23m in property costs, bringing the total to over R100m in the past two years while slashing its tax bill by R98m from the first half of the previous year.
This helped it post an operating profit of R59m for the half year ended January, a huge leap from the R915m loss it reported this time last year. The company still recorded a headline loss a share, but at 60c a share it was an 83% improvement on last year’s 350c a share.
But EOH’s sales have shrunk drastically. Total revenue dropped to R4.376bn from R6.194bn as the group sold underperforming and noncore businesses.
So what does a shrinking company offer investors who are hopeful of a return to the good times?
Says Van Coller: “We will now be focused on scalable, ICT growth segments relating to automation, cloud, data security, analytics app development and the internet of things. We’ve seen all that revenue growing in double digits, and that’s really important for the future.”
And the fact that the company has been awarded multiyear contracts means that “every year when you start, you’re not starting from zero, you’ve actually got a good mix of contracts that are rolling. This has been one of the pleasing aspects of the six months, because we’ve spent a lot of time on that sales strategy, building the team, not just being a product pusher any more,” says Van Coller.
Pydigadu says the aim is to reduce the debtto-earnings ratio — a metric used by creditors to determine the ability of a borrower to pay their debts and make interest payments — to between 1 and 1.5. Having made R363m in earnings before interest, tax, depreciation and amortisation for the period, that translates to about R726m in annualised earnings. That is still well
below its borrowings of R1.8bn.
Even if the company were to reach its target, Takaendesa says EOH’s balance sheet would still be too weak to shoulder the debt.
“Even that 1-1.5 [target] I don’t think is the right number for an IT services business. Ideally, you don’t want to keep high gearing in these businesses,” he says.
Unlike telecoms or property companies that have networks or buildings to sell to pay back debt, IT services businesses tend to have little in the way of assets to handle debts.
Under the previous regime of Bohbot, EOH was a voracious buyer of companies. Initially, it was able to use its shares, which enjoyed an unbroken rally for well over a decade, to purchase other firms. As its stock faltered, however, it was unable to continue growing through acquisition.
Van Coller told shareholders last week that the company has almost closed all the troublesome government contracts linked to the disgraced public sector unit, EOH Mthombo.
Once EOH has hit its debt targets, it will begin to look at ways of growing its international revenues.
While its shares fell 6% on the release of its half-year numbers, the stock has nonetheless staged a remarkable rally in the past year, gaining 148%.
But at R8, regaining its 2016 peak of R175 is still a long, long way off. x