EOH shares extend slide as Microsoft serves more termination notices
Shares in EOH fell as much as 7.5% on the news in morning trading
EOH shares slumped on the JSE, pushing the loss of value since the end of 2018 to about R3bn, after confirming that US technology giant Microsoft has officially terminated its contract with the scandal-tainted company.
EOH's share price started tumbling when allegations of corruption involving a SA Social Security Agency contract surfaced in early 2017. Since then more similar allegations also came to light. On Monday, EOH announced that a number of its subsidiaries received more cancellation notices from Microsoft Ireland on 12 March.
EOH’s share price fell as much as 7.5% to R13 by midday on Monday before paring losses to close at R13.52. This has pushed the slide since the end of 2018 to just under 55%, shaving off about R3bn from the company’s market capitalisation.
Microsoft SA served EOH's subsidiary, EOH Mthombo with a cancellation notice in February after an anonymous corruption complaint. EOH hired a forensics team to look into the matter and has since suspended or received resignations from those implicated, CEO Stephen van Coller said in a letter to staff in February .
EOH was hopeful after meeting with the software giant that it could save the contract and remain a reseller of Microsoft software licences. But the 30-day notice period ended without a resolution it had hoped for.
As for the latest notices, EOH said it was still assessing the impact but estimated that it would be less than R20m during the current financial year.
“This will bring the total impact of Microsoft exposure to R30m profit before tax. Moreover, there is an overall medium to long-term go-to-market and credential impact and risk in not retaining Microsoft Gold Partner status,” said EOH said in a statement .
Nadim Mohamed, analyst and partner at First Avenue Investment Management said the terminations will make it harder for EOH to offer the full set of Microsoft products, even with the third-party arrangements the company has secured. But of most concern, he said, is the cloud that still surrounds Microsoft’s decisions.
“There is a lot of rumour going around. For Microsoft to completely distance itself when EOH is their biggest partner in SA, there must be something there.”
Irnest Kaplan, MD of Kaplan Equity Analysts, said the new developments were bad for EOH and time will tell how they will impact the company's reputation.
“The announcement about the additional cancellation notice from Microsoft Ireland is new information. It appears that Microsoft is looking to distance itself further.”
Kaplan said having no official communication from Microsoft added another layer of negativity as the market does not like uncertainty.
Ruhan du Plessis, analyst at Avior Capital Markets said while the loss of Microsoft Gold Partner status will affect retention of customers and will add to EOH’s reputation woes. “Concerns around customers leaving to other reseller with less reputation risk and uncertainty around EOH’s ability to retain agreements with other suppliers remain.”