In a pre-closing update ahead of the publication of the group’s interim financial results for six months to end-January 2020, EOH Holdings signalled that it’s slowly turning the corner, operationally at least, but that legacy clean-up costs and the weak economy continue to weigh on its performance.
“Trading remains under pressure due to the weak macro environment, which has resulted in companies reducing their IT spend,” it said.
Although its core iOCO subsidiary — its traditional IT services business — is “tracking well with key clients maintained”, lingering effects of eight “legacy” public sector contracts “still being exited” will have a negative impact on performance during the reporting period.
It said it is working to optimise overheads, manage tax inefficiencies and reduce the interest burden through a reduction in debt.
Before adjusting for discontinued operations and assets held for sale, cost savings are expected to be more than 20% against those of the prior year and include the benefit of exiting more than 19 rental properties in the last six months.
It has also made good progress in implementing a more robust cash management system. “This will ultimately reduce the need for the historically large and inefficient cash balances. Cash balances are anticipated to be marginally lower than the prior reported period, mainly due to the removal of cash for disposed assets.”
For the six-month period — the results will be published on 7 April — EOH expects the overall business to have a “positive operational cash trajectory, before once-off costs, as the business starts turning”.
Share price hammered
The latest update comes as EOH’s share price plunged this week to levels last seen in 2009 as investors worried about the still-murky outlook for the group’s turnaround under CEO Stephen van Coller, who was hired from MTN Group to replace founding CEO Asher Bohbot. Smaller-cap shares listed on the JSE, EOH among them, have also come under significant pressure in recent months as investors take a risk-off approach.
At the presentation last year of its results for the 12 months to July 2019, CEO Stephen van Coller described the previous financial year as “one of the most challenging periods in the history of EOH”. It reported a loss from continuing operations of more than R4-billion, though the revenue line held up well.
EOH had a torrid 2019 after it emerged that Microsoft had cancelled a partner agreement with the group following allegations of malfeasance in a software supply agreement with the South African department of defence. That prompted Van Coller to ask law firm ENSafrica to conduct a thorough investigation into all of EOH’s public sector contracts.
“Following a tough but necessary forensic investigation, ENSafrica has concluded its investigation, allowing EOH to focus on building the business,” it said in the trading update. “The board of directors has agreed to ENSafrica’s recommendation to pursue civil prosecutions against some of the perpetrators identified during the forensic investigation. The board of directors has instructed ENSafrica to commence legal proceedings.”
Of the legacy public sector contracts still in place, eight contracts out of 54 continue to have a negative impact on the financial performance of the business, it said. “These contracts have a special focus where the operational and financial viability are managed and tracked.”
It said government business remains an “important segment” for the group, but contracts must be “premised on sound contracting, project management and a collections focus”.
EOH raised more than the targeted R1-billion in asset disposals in the 2019 calendar year and will continue to pursue the disposal of non-core assets “aggressively”, it said. The biggest sale was of Construction Computer Software, better known as CCS, for R444.4-million.
R624-million in proceeds from the sales has been received in cash. About R180-million of this relates to cash proceeds received during the first half of the 2020 financial year. More than 75% of all cash proceeds received will be applied to the settlement of debt and associated interest repayments as well as certain one-off costs, it said.
‘Long-term sustainability’
“As part of EOH’s stated deleveraging strategy, the group is considering all viable options to enable a more fit-for-purpose capital structure appropriate for a large services business. This process is currently focused on the sale of certain assets and the whole or part of the IP businesses to strategic partners over the next 12-18 months. However, the group remains agile and engaged in this regard as an appropriate capital structure is key to long-term sustainability.”
EOH’s share price was trading at R8.81 shortly after the trading update was released on Thursday. Year to date, it has fallen by 29.6% and over the past year, it’s down by 66.7%. — © 2020 NewsCentral Media