EOH shares plunge over hint at rights issue

Shares in scandal-plagued technology group EOH, which has been working to regain its reputation and credibility, crashed by almost a fifth on Friday as the company hinted at a possible rights issue to raise extra cash, which is likely to dilute its stock price.

By now the misfortunes of the former JSE darling, whose shares once fetched R172 and are now trading more than 90% south of that, are well known.

After three years of grind, EOH, which is back in the black operationally after returning to profit in its 2021 year, has said success in closing out loss-making contracts helped it hold on to its margins thus far in 2022, putting it in a position to consider its next steps in tackling its R2bn debt pile.

Tough economic conditions under Covid-19 and the emergence of the Omicron variant have put pressure on customers, EOH said in a trading update on Friday. It added its trading performance has continued to improve, and it is now appropriate to begin engaging the market over solutions to a debt pile well in excess of its market value.

“Given the continued improvement of EOH’s trading performance, the EOH board and management team believe this is the appropriate time to engage with shareholders, lenders and the market more broadly to determine the optimal solution for the company,” the group said on Friday.

Financial advisers have been appointed to assist in the evaluation of strategic options, the group said.

EOH’s shares fell the most in nearly two years on Friday, closing 16.61% lower at R5.27 but off the intraday low.

One of the options on the table is a rights issue to existing investors. But such a move will increase the number of shares available for trading on the JSE, and the dilutory effect is likely to drive the share price even lower.

“Having largely concluded the sale of noncore assets, these options primarily comprise an equity raise [a rights issue] from existing and/or new investors, the introduction of mezzanine debt, a combination of the above solutions or the further disposal of assets,” the company said.

New investors may include those that could assist “with increasing the group’s BEE ownership as well as potential strategic partners”, it added.

EOH, valued at R930m on the JSE, cut its debt by about R400m in its 2021 year but has said progress has not been as fast as it would like. The group has been fighting to regain credibility after revelations of a corruption scandal surfaced, which contributed to a 96% fall in its shares over the past five years.

In September 2018, it brought in former MTN executive Stephen van Coller to turn the group around and has recently been pursuing a strategy of selling off noncore assets, closing out loss-making legacy contracts and pushing a strategy of being more client-focused, and offering more holistic services.

Van Coller appointed law firm ENSafrica to investigate allegations of fraud and corruption. The investigation found underhand dealings with its government client, including transactions to the value of more than R600m with no evidence of valid contracts being in place or for which no work was done.

EOH said on Friday its cash generation has improved, and it had a cash balance of R722m on January 27, from R437.2m at end-July.

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