EOH’s 2018 financial year has got off to a rough start. The diversified IT services group said on Wednesday that headline earnings fell 23% in the six months to 31 January 2018, from R595.5m a year ago to R458.4m, and has blamed margin pressure, weak public-sector spending an even “adverse” media reports for the poor numbers.
However, it said it expects a significant turnaround in the second half of the financial year, based in part on an improving economic and political climate in South Africa.
EOH’s top line looked healthy in the period, with group revenue from continuing operations climbing 18.9% to R8.4bn. Operating profit, however, was R784m, down from R838m previously. Headline earnings per share fell 24.3% to R3.14.
“The combination of the macroeconomic environment and the adverse, unfounded media coverage that EOH received temporarily affected the group’s position in the market,” it said in notes alongside the interim results. “Despite these market conditions, all areas of the business coped relatively well.”
However, it said the public-sector business had a “particularly tough period as a result of the political uncertainty, squeeze on public-sector funding and delays in sign-offs as well as the awarding of contracts”.
“Payment practices from the public sector over the past year were poor. However, we have seen a marked improvement in the last two months.”
Margins also came under pressure as EOH adopted a “deliberate customer retention strategy”. It said this strategy saw it retain all major client contracts and gain market share. “Since February 2018, there has been a positive shift in the market towards EOH, resulting in a normalising of the environment and client engagements. These are strong indications that margins will normalise in the second half of the year as stability returns and business confidence grows.”
Once-off hit
The group revealed it took a once-off hit to earnings after tax of R386m from its decision to unwind its acquisition of the GCT Group (Grid Control Technologies, Forensic Data Analysts and Investigative Software Solutions) through a “sellback” agreement in October 2017. This had a negative impact on earnings per share.
Cash generated by operations before changes in working capital was about R1.1bn. Working capital increased by R995m because of growth funding, increased work associated with long-term projects and slower cash collections, particularly from the public sector, it said.
“This trend has begun to change … and since 1 February 2018, the group has received payments totalling over R500m from outstanding public-sector debtors… With the normalising of our environment, an emphasis on organic growth, and stringent working capital management, the board is confident of improved margins and a higher cash conversion rate moving forward.”
EOH’s share price closed at R48 on Tuesday, ahead of the results announcement. The counter has slumped in the past year and is now trading at a fraction of its 52-week high of R145. — © 2018 NewsCentral Media
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