EOH warns of more write-downs amid governance cleanup
Technology group is on a drive to root out corruption and repair its reputation
Technology group EOH, which reduced the value of certain assets by R1.7bn in April, has warned that more impairments could follow as the group restructures itself and looks to repair its dented reputation. The news resulted in the share price dropping 8.2% to close at R16.31 from highs of more than R170 in 2015.
Led by CEO Stephen van Coller since September 2018, EOH has been on a drive to root out wrongdoing in certain subsidiaries following an aggressive acquisition spree. The group has been plagued by governance concerns in recent years.
In an update to shareholders, Van Coller said that “it has been a challenging six-month period but the group has made meaningful progress on a number of fronts”.
EOH said while it had been negatively affected by governance concerns, “some improvement has been noted” following an update into the forensic investigation by ENSafrica.
“However, the benefits will not be realised until after year-end … This has resulted in revenue remaining under pressure, which has increased further in the second half of the year, in part due to one-off hardware sales not being repeated in the second half of the year,” EOH said.
The company said it expects lower revenues in the second half of the financial year.
It said the anticipated further write-offs “are not expected to be of the magnitude of those made at the half-year”.
Peter Takaendesa, portfolio manager at Mergence Investment Managers said “the key challenge over the mid term will be how to downsize the cost base to match the lower revenue base”.
“They still have about 11,000 employees and revenue is flat in a 4.5% CPI inflation environment,” he said.
Takaendesa said EOH's share price has “stabilised somewhat recovering from their April 2019 low levels but legacy issues and softer operational performance are holding back a sustained recovery”.
The sustainability of any share price recovery is dependent on the successful disposal of assets to strengthen the balance sheet, improved profitability in remaining operations, improved cash generation in the business and no other major suppliers terminating their relationship with EOH, he said.
In July EOH said a probe into its past dealings with the government uncovered “suspicious transactions” worth R1.2bn. These were mainly within the public-sector business operated by EOH Mthombo. Van Coller said at the time eight perpetrators were responsible for most of the irregularities.
Takaendesa said the longer all these issues take to be resolved, the more difficult it will be for the company to enter or renew long-term customer contracts at normal profitability levels.
“The South African IT market remains tough and competition is increasing, with a stronger Altron and BCX, while EOH is still dealing with legacy headwinds,” he said.
Van Coller said in addition to EOH's new board “with experienced professionals, I have every confidence that the fundamental strengths of the business and its people will prevail in the longer term notwithstanding the pressures the business is facing”.