EOH share price surges 30% on asset disposal plans
The company has said it will dispose of additional assets as it seeks to address a R3.2bn debt burden
Shares in EOH rebounded by almost a third on Wednesday, a sign that investors may be starting to buy into the technology firm’s turnaround efforts after a devastating fraud scandal involving its employees and the public sector.
EOH, whose stock value has almost halved so far in 2019, is in the middle of cleaning up its balance sheet following allegations of underhanded dealings with the government, forcing the company into taking billions of rand in writedown charges and losing nearly R1bn.
CEO Stephen van Coller, who took the helm in September 2018, has drawn up a recovery plan that includes selling assets to reduce the firm’s R3.1bn debt pile and improving corporate governance standards.
The share price reached a two-month high on Wednesday, with analysts citing assurances from Van Coller that the company would pay down its debt via assets sales, while a clearer picture about the scale of the corporate governance flaws from an ENSafrica investigation, which is nearing completion, added to the positive sentiment.
The stock rose as much as 30% during the session on Wednesday, before paring some of the gains to close 18.3% higher at R16. But it is still a long way from the highs notched up just three years ago when it was fetching about R178 a share.
Some reassurance that EOH is still on target with asset disposals could have given some investors comfort that there would be less risk regarding its balance sheet, said Mergence Investment portfolio manager Peter Takaendesa.
"But we have seen this before, that they will try to reassure markets then something else happens and all these gains are lost again."
As part of clean-up efforts, Van Coller has said EOH Mthombo, the business unit implicated in the fraud and which was primarily responsible for securing public sector contracts, would be closed down; but he told Business Day that EOH was still keen to do business with the government.
EOH Mthombo accounts for 18% of the company’s nearly R12bn revenue.
"I still think the government business is interesting business," he said. "It takes two to tango. You can’t just say the government was bad and we got sucked in. That’s nonsense. We were part of the problem."
He said EOH needed to strengthen its governance systems to ensure that its employees can easily pull out of a contract when they are asked to "do things the wrong way".
"We’ve learnt the hard way .... you don’t want to win business at all costs," Van Coller said.
The ENSAfrica investigation revealed close to R1bn in underhanded dealings, including transactions with no evidence of valid contracts being in place or where no work was done (R665m), as well as R90m of loans written off and overbilling of about R180m.
The investigation has also resulted in up to 46 persons being reported to authorities. Of these, 16 employees at EOH were implicated directly in the wrongdoing together with 12 government employees.