EOH: still over a barrel
EOH has clawed its way back into profit. But with fewer businesses under its belt it is generating fewer sales — they are down 20% to R3.5bn for the six months ended January. Nevertheless, headline earnings came in at 41c a share, a 214% improvement from last year’s loss. But EOH is still over a barrel with its bankers, and may have to plump for a rights issue to kill off its remaining debt. The FM spoke to CEO Stephen van Coller.
How taxing has it been to get to this point?
SvC: It goes through phases. Obviously, the beginning is difficult, because you’re faced with bribery and corruption, you’ve got reputational risk, you’re dealing with customers. You end up having to fire people, discipline people. It’s the ugly side of business — but it has to be done. And there are tons of naysayers who always want to keep the negative news going; you have to keep your head above that.
But what’s hugely satisfying is when you go through a period like Covid, when in many cases you had two or three people in a family working but now there’s only one and your resolve has managed to save that person’s job.
Businesses aren’t corrupt; people are. So it’s not that EOH was corrupt, some of the people in EOH were.
And when there’s lots of negativity out there, all you’re doing is hurting the
99% of the people who just want to make an honest living and look after their families. It’s hugely satisfying now, when you’ve made a profit and turned the business around though everyone thought you couldn’t do it.
Have you come under pressure from shareholders who felt it was all taking too long?
SvC: Largely not. Most of them were just grateful that we saved it, because it could have been worth nothing. I think there are mixed views about whether we should have been transparent about everything.
My view is that I didn’t have a choice. I wanted it in the public eye. There was no way I could not be totally transparent — otherwise we would have lost credibility and customers.
There were mixed views about whether we should have spent so much money on the investigations. But my personal view is that if we don’t have corporate SA standing up to corruption, we have nothing left.
I see how our customers have returned in droves, and even people who’ve never been customers signing up with us, saying: “Given what you’ve done, we think we need to put you on our procurement list, because we want to support companies like you.”
What are EOH’s prospects now? You had to sell a lot of yourself to cut down debt, for example, so you’re a much smaller company.
SvC: I don’t think it changes your trajectory; it just means you’ve got fewer businesses that can grow. Generally the ICT industry is largely correlated with GDP and grows slightly faster than GDP. In Covid we didn’t go backwards, we flatlined; so it’s quite a resilient industry at the moment, because people are trying to take costs out, digitise, deal with work from anywhere, shop from anywhere, and so forth. There are definitely businesses I didn’t want to sell, but I didn’t really have a choice. I had to make a deal with the banks on how we were going to reduce the debt. And there was just a mathematical calculation on the level of interest you pay vs the value you can get from your assets.
In most cases we were lucky, because being an ICT business we’ve been able to get a bigger value for our assets than the cost of interest. That has made a difference in why we’ve got to where we are. Debt was R4.1bn and we’re at R1.6bn now. We have announced two sales, so at the end of this year [debt] will be at about R1.1bn. So we’ve paid down R3bn at 10% interest — that’s R300m a year that we’ve saved, and this is why you’re
starting to see us make profits.
Where do you see future growth?
My view is that if we don’t have corporate SA standing up to corruption, we have nothing left
SvC: Clearly the themes are around automation, the cloud and security data analytics — and, in medium-sized to large corporates, there’s a big outsourcing trend. There are also a number of customers in SA where we have a very small market share, so we’ve been driving that. And then we’re trying to increase our market share of specific solutions in the UK and the Middle East, where we have a 0.1% market share, so there,
even if you get to 1%, you will have grown 10-fold. We’re doing all these — but slowly, slowly.
The question of a rights issue remains the market was properly spooked in January when you announced such a possibility. Are you trying to delay it, that you haven’t yet confirmed it?
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SvC: I would never have gone out to the market in January if the banks hadn’t told me to. It was at their behest. In a normal situation you would have gone and spoken to your shareholders first. They must either pay the 12% interest — because the banks basically suck the cash out of the business — or they can put in money and invest some of that cash flow back into growing the business, which at some point can start paying dividends. So the shareholders need to make a decision. If they want me to sweat it out or sell more assets rather than do a rights issue, I’ll do that. If they would prefer me to get a strategic partner, I’ll look for one.
If they say “It’s time we got our money out of this thing, but we’d rather put the money in to normalise the business totally, so that you can drive growth — then tell us what your growth strategy is”, that is what we’ll be debating. To sign our lending agreements we had to agree to start this process publicly, and that was a little disappointing, because it did hurt the share price.
How long might this decision still take?
SvC: From the day I call the AGM to get shareholders to vote, I have to give them a month. Then they vote, and if they say “Yes, we want a capital raise”, there are at least another 21 days for the JSE process. After that we need to get an offering memorandum, which needs to be signed off by lawyers and the banks; and I can do that only off a set of results. I just feel more comfortable that we do it off audited accounts, which can only be at the end of the year. So there’s a lot of work between now and then.
Do the banks play too hardball?
SvC: The problem in SA is that as soon as you’ve got a syndicate of banks — we have four — there’s not much other optionality. You’re dealing almost with a monopoly, so you take what you get. They can decide whatever they want, and it really puts you in a very weak spot.
Is that something that corporate SA needs to look at?
SvC: There are a few things. The one is that we don’t have a very liquid corporate bond market. In the US or the UK, companies have other options — they can go to asset managers who do debt and issue bonds. We don’t really have that, unless you’re a JSE top 20 company. You’re at the behest of the banks, and when there are only a few of them, they can wield a heavy axe.
What about the Public Investment Corp (PIC) and its destructive habit of selling out when a company’s doing badly and buying in again when the going starts getting better?
SvC: You must remember that the PIC follows indices. When we got too small, we fell out of the index, so it just got rid of our stock. At some point, when we get our market cap back up, it will buy back in, which should be very positive.
Is the PIC an option to talk to about your capital structure — to support you on your journey up?
SvC: We’ve been to everyone — all the big players, about 20 asset managers — just to put our case forward. But the large people, unless you’re in an index, they’re not really interested.
Do you think your shares are fairly priced for where you’re at right now?
SvC: I can’t really comment, but I’ve got my strong views. On a mathematical basis, just on multiples, it’s undervalued. Obviously, as I’m running it, I’ve got a different view of the risk to someone who is on the outside looking in.
If Microsoft had to come back into your lives — after having dropped you on your governance woes would that be a big deal?
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If they want me to sweat it out or sell more assets rather than do a rights issue, I’ll do that
SvC: From a revenue perspective and profit, no. The issue is reputational. If they came back and said “OK, we’ve been through everything, we’re happy to accept EOH as a partner”, that would just put all the noise to bed.