EOH shares recover on asset sale plans

● A week ago the market deemed EOH to be worth only about a half of its net asset value, but that gap has narrowed significantly since the technology services group said it would sell part of its business to reduce debt.

Shares in EOH rallied more than 70% since Tuesday when it announced plans to raise R1bn by disposing of noncore assets within the next three months to a year.

The company, which has sprawled into Africa’s largest technology services group over the past decade, has been plagued by governance concerns, notably US software giant Microsoft ending a licensing deal with one of EOH’s subsidiaries following graft allegations.

Former banker Stephen van Coller took the reins as CEO last year and has since embarked on a restructuring of the business.

“The announcement that they will be disposing of assets is a clear signal that [Van] Coller is trying to close the gap between the NAV [net asset value] and market capitalisation,” said Gryphon Asset Management portfolio manager Casparus Treurnicht.

EOH this week reported flat revenue growth for the half-year to end-December, mostly because it was hardly adding new businesses to its stable.

The acquisitive spree of the past decade has resulted in EOH growing into a group with 11,000 employees spread over industry consulting, IT services, software, industrial technologies and business process outsourcing.

But the CEO has said previously that he wants to slim down the portfolio and refocus it.

“Van Coller is well regarded in the market and seems to be cleaning up shop at EOH,” said Chantal Marx, FNB Wealth’s head of equity research.

Raising the R1bn, which the company wants to apply against gross borrowing, might not be easy. Treurnicht said it remained to be seen whether EOH and potential buyers of these assets attached the same value to them. Noncore asset sales would do a lot to shore up the balance sheet and improve the cash position, said Marx. This was what the market responded to so positively this week. Shares in EOH jumped from around R11 on Monday to more than R22 by Thursday. “There is still a lot of risk attached to the name — execution risk on asset sales and the restructure, along with uncertainty around key relationships following the Microsoft withdrawal are front of mind,” cautioned Marx. Though it involved a small part of its total business, Microsoft’s decision this year stuck the knife into what was already a sell-off in EOH’s stock. “Microsoft was a bomb and we had no idea it was coming,” said Van Coller. But the company has since spoken to most of its other partners, some of which were satisfied with the engagements, but others had asked for enhanced due diligence, he said.