EOH lost more than a fifth of its value on Wednesday — continuing a precipitous decline that started in late 2016 — after the technology group said earnings for the six months ended January could fall by almost a third.
The stock closed 21% lower at R59.50. EOH’s shares have lost more than 60% of their value since the start of 2017, partly due to allegations of procurement irregularities levelled against a subsidiary and forced share sales by directors.
This followed years of strong growth, which was partly fuelled by acquisitions that were funded with shares.
“The [trading update] was really poor because they weren’t quick enough to cut the cost base,” said Wayne McCurrie, fund manager at Ashburton Investments. “They reassure us that the second six months will be significantly better because they’ve addressed the costs, so we’ll have to wait and see.” McCurrie said Ashburton would “ride out the tough times” and would not sell its EOH shares. The stock was also now relatively cheap.
While EOH said interim revenue was likely to rise 16% to R8.4bn thanks to market share gains, profit metrics had worsened because of weak performances from divisions that catered to the public sector.
The group was also forced to sacrifice margins to retain customers, it said.
Headline earnings per share were expected to be between 307c and 350c, a decline of between 20% and 30% from a year before. McCurrie said the market had expected earnings to grow as the underlying business remained healthy, with sticky long-term contracts.
EOH said it “expects improved market conditions and increased business confidence over the next period”, adding that its underperforming units would probably fare better in the second half.
A new strategy, announced on Monday, would lift EOH’s empowerment credentials and result “in a more competitive and cost-effective organisation, leading to increased profitability and accelerated growth”.
The company plans to split its operations in two, with one entity retaining the EOH brand and the other — a more specialised unit that would grow through acquisitions and organically — taking on a new identity.
EOH has partnered with empowerment firm Lebashe Investment Group, which is to inject R250m worth of equity into the group and provide it with a R3bn bond facility.
EOH would issue 40-million new unlisted redeemable A shares — with the same voting rights as ordinary shares but reduced dividend rights — to Lebashe to increase black ownership.
EOH also said that Asher Bohbot, the group’s founder who stepped down as CEO in May 2017 to take a six-month sabbatical, had replaced Sandile Zungu as nonexecutive chairman. Zunaid Mayet replaced Bohbot as CEO in 2017.