What gives at EOH? An incredibly shrinking share price suggests the tech group is now further away from a long-awaited turnaround than when it announced its rights offer just more than a year ago.
In late October 2022, when EOH first detailed plans to raise R600m in new capital, the group was trading at about 420c on the JSE. The “breakeven” price — taking into consideration the new shares issued in the rights issue — was about 175c. At the time of writing EOH was trading at 137c, having plunged as low as 111c last week when empowerment partner Lebashe Investment Group (the FM’s ultimate owner) appeared to have been forced to sell a small portion of its strategic holding in the group.
The share price seems to ignore a strenuous turnaround effort that has ticked most boxes, even if the effort to rightsize EOH and return the business to profit was hampered by extraordinary events such as Covid lockdowns, local unrest and the outbreak of hostilities between Ukraine and Russia.
Take outgoing CEO Stephen van Coller’s comment in the just-released annual report that “with the completion of the successful capital raise we officially moved into a new growth era”.
The new financial year, ending in July 2024, should give investors a glimpse of EOH’s true potential. With the “correct capital structure”, it has pencilled in revenue of nearly R6bn and earnings before interest, tax, depreciation and amortisation (ebitda) of R487m at a margin of 8%. Profit after tax could come in at about R112m, which would translate into earnings of about 18c a share. Some commentators, however, have forecast earnings closer to 30c a share for the 2024 financial year.
Asief Mohamed, chief investment officer at Aeon Investment Management, says Van Coller and the management team put in a solid earnings base from which to grow.
“The introduction of excellent governance principles and leadership will help in the next growth phase of EOH.”
In the past financial year to end-July, EOH would in fact have registered an international financial reporting standards profit if a R60m interest charge, caused by the eight-month delay in finalising the rights offer, and a R49m accounting charge on the price differential in the issue of shares for cash to Lebashe were stripped out.
Further cost-cutting initiatives, which could save between R50m and R70m on an annualised basis, could reinforce group operating margins in the new financial year.
The X factor for the 2024 financial year could be EOH’s international thrust.
The X factor for the 2024 financial year could be EOH’s international thrust
Van Coller reported “great traction” in EOH’s international strategy in its digital enablement business. “We made our first growth investment into this business in 2022 and have already seen a 21% increase in revenue, and are targeting R1bn by 2025.” Ebitda from international operations was up more than 40% to R56m in financial 2023.
Van Coller believes EOH’s depth of skills in South Africa and Egypt provides a significant cost advantage when working for international clients. “We focus on areas where we can leverage this advantage, particularly in app development, data and analytics, cloud advisory and remote infrastructure support, especially where we already support the South African operations of international clients.”
EOH has also made progress with its expansion into East and West Africa after securing exclusive Aveva software distribution rights in these territories in 2022. On a R17m investment in sales and office infrastructure, the unit brought in R51m in the first year — a “very encouraging start”.
Van Coller has agreed to stay on beyond his agreed five-year tenure and will serve an extra six months to ensure outstanding issues are properly resolved by the end of March next year.
EOH’s five business units are already run autonomously by three business heads, who might well question the role of a new CEO in what is now essentially an investment holding company.
There is talk in the market that one of the reasons for Van Coller’s extended tenure is to unlock value at EOH. But at this point a management buyout seems unlikely.
Mohamed suspects corporate action could be afoot. “What is more probable is a takeout from either a global or local firm rather than a break-up deal.” At close to its rights offer price of 130c, says Mohamed, “the share offers value”.
The divisional breakdown in the latest results makes for fascinating reading in terms of stacking up a potential value for EOH’s best parts.
The large iOCO segment generated revenue of R4.2bn and ebitda of R385m, with an additional R56m ebitda earned by its fledgling international operations. The promising EasyHQ segment reported a 5% drop in revenue to R845m as loss-making contracts were closed out, but ebitda jumped 33% to R122m.
The question is whether potential suitors will bide their time, in light of Van Coller’s view that the turnaround at EOH could be dramatic once it’s settled all its legacy debts.
Then there’s the pall of gloom over JSE small caps. As Van Coller pointed out, about R100bn of foreign money has left the JSE over the past 24 months. “This exodus of investment money has left many small caps undervalued with less money available to own the small caps, resulting in very low trading liquidity and therefore depressed share prices.”
A few remain hopeful, though. EOH acolytes are already whispering about a possible indicative price of close to 300c a share should a profitable EOH attract a suitor or suitors.
For the moment, the market strongly disputes such an outcome. But it wouldn’t be the first time in recent years it gets it badly wrong.
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