EOH HOLDINGS: A model that works and grows
Technology group EOH has been on a decade-long winning streak, and while expansion is expected to continue, it may be at a slower rate than before.
EOH’s share price has surged about 400% since 2012. It has been growing at a compound annual growth rate of about 40% in that time.
The company provides consulting, technology and outsourcing services. Over the years it has acquired medium-sized businesses, many of which have a strong entrepreneurial culture and offer niche services.
The acquisitions have widened its geographical reach to more than 20 countries in Africa and the Middle East.
What makes EOH stand out is, among other things, that it has a decentralised model that is attractive to entrepreneurs. For example, the group takes care of support services, and this allows entrepreneurs to focus on product development. EOH also exposes entrepreneurs to new corporate customers and enables them to monetise part of their wealth through shares in the group, says Mvunonala portfolio manager Thato Mashigo.
Mashigo believes the company’s growth momentum may continue, given the increasing contribution of software-as-a-service revenue. Though such services are low margin, growth from it is stable. Typically such contracts have built-in escalations that allow real top-line growth and don’t require annual renewals.
"EOH is likely to grow at an acceptable rate — but [continued growth] at historical rates will become challenging because of the scale of acquisitions required from a larger base," Mashigo says.
The SA market is relatively mature, and geographical expansion is expected to help offset this over the next five years.
But analysts have warned that growth may also come with risks.
According to Mergence Investment Managers portfolio manager Peter Takaendesa, EOH remains well-positioned in SA and is well
managed; however, risks could lie in its international expansion or a sudden change of top management.
EOH CEO Asher Bohbot has been at the helm since 1998, when he founded the company. But EOH has strong depth of leadership that could take over from him. Moreover, he has kept on many of the founders of the businesses the company has acquired.
Another potential risk may be in buying larger companies and foreign ones that do not perform as expected.
"This not only places shareholder capital at risk, it may distract management from the SA business if it needs to be more actively involved with foreign partners than with local business associates," says Mashigo.
He says growing exposure to public sector work may carry the risk of greater working capital requirements if the payment cycle is extended. This could lead to less cash being available for acquisitions and a greater reliance being placed on debt for acquisitions.
Could EOH become a takeover target in the medium term?
At the moment, the company is more likely to continue buying other businesses.
With an enterprise value of over R25bn and a p:e ratio of close to 20, there are simply not many local companies that can afford to acquire EOH and justify it as a strategic fit.
"Since the business does not need much outside capital, and because growth rates are still quite healthy, we believe management and shareholders are likely to demand a significant premium from any potential acquirers, which would push them away," says Takaendesa.