Scepticism around EOH rejig plan
The technology group plans to split in two, but it still has to convince investors that good governance has been restored
With its market rating hammered to a 4.5 price:earnings ratio, the once high-flying EOH is pinning its hopes on a rejig of its corporate structure to restore investor confidence. It faces a huge uphill battle. Under the beleaguered technology group’s master plan, next month it will be divided into two independent business units roughly the same size in terms of revenue.
One unit under the EOH brand will house traditional ICT operations and the other, under a new brand, Nextec, will house, as EOH puts it, "specialised solutions for high-growth industries".
In a big management change, Nextec will be headed by current EOH group CEO Zunaid Mayet. In the wings, apparently, is a new group CEO hyped as "highly regarded with a solid track record and a strong background in corporate finance, investment banking and technology". Quite who this is, nobody knows yet.
Casparus Treurnicht, an analyst at Gryphon Asset Management, is unimpressed by the restructuring. "Splitting EOH into two units does not alter anything," he says. "It only makes the group more complex."
Far more crucial for EOH is to convince a sceptical market that it has restored sound corporate governance. Confidence in EOH’s governance was shattered by a series of allegations linking it to corrupt practices in its dealings with public sector organisations. Not least of these involved three companies — Grid Control Technologies, Forensic Data Analysts and Investigative Software Solutions — acquired in 2015 from former policeman Keith Keating for R365m.
The three companies were the target of a damning probe by the Independent Police Investigative Directorate in 2017.
Though EOH unwound the deal with Keating in January, the stigma has remained. EOH turned to ENSafrica in the hope that the law firm would assist in restoring its credibility.
It got the answer it wanted. According to EOH, ENSafrica "found no evidence implicating EOH of complicity, awareness or condonation of any illicit activity that may or may not have taken place".
Reinforcing the finding, EOH has appointed ENSafrica to play a monitoring and oversight role in all its major public sector bids, contracts and engagements.
EOH has also acted to beef up its board, relieving four executives of their roles as directors and appointing two independent nonexecutive directors in their place.
There has been positive reaction to EOH’s strategy and governance announcement, with its share price lifting 38% off a six-year low since its release on June 27.
Even so, that is still 80% below its record high in September 2016. As an old market idiom goes, even a dead cat will bounce briefly if it is dropped from high enough.
"EOH should still be approached with a touch of scepticism," says Keith McLachlan of Alpha Wealth. His caution relates to a deterioration of EOH’s cash flow and balance sheet caused by sharply rising debtor receivables.
By the end of January, EOH’s accounts recievable (what it is owed by its debtors) had shot up to R5.92bn. This was equal to 35.4% of its annualised revenue of R16.7bn — a sharp spike from the level of around 23% it was at three years before.
"I wonder if there are some debtor receivables that should be impaired," says McLachlan.
EOH may look cheap, but as McLachlan points out: "Why take the risk when there are many other small-and mid-caps with strong management and growth records offering excellent value?"