EOH shares rally on asset sale plans
Investors seem happy with EOH's plans to sell non-core assets worth R1 billion to bring down its debt levels.
The JSE-listed company's share price is worth double what it was a week ago, as investors seem to be buying into the company's turnaround talk and straight-shooting new CEO Stephen van Coller.
The stock was worth R11.22 a share on 11 April but closed at R22.80 per share yesterday. This after the stock has seen a significant decline over the past year, hit by worries over governance concerns and more recently fallout after the cancellation of a Microsoft channel partner agreement after an anonymous tip-off about alleged malfeasance.
EOH has initiated an internal investigation, supported by ENSafrica, into its channel partner business unit and the investigation is expected to be concluded by the end of next month, after which the findings will be made public.
The group has now identified assets it wants to sell to strategic partners, worth around R1 billion, and says the sales will take place over the next three to 12 months.
Van Coller told ITWeb in an interview this week that the IT services company needed a strategic refocus and has been through a process to create a definition of what it thinks its differentiated strategy will be going forward.
"We just put all the businesses through this filter, and they either filtered out yes or filtered out no. And the ones that filtered out no, we've packaged into verticals and we're doing processes in each of those verticals.
"A big chunk of them are actually profitable businesses. I'm just not the right owner. And I think it's irresponsible for me from a shareholder perspective and employee perspective, just to hold on to it because it's a profitable business. I can't make it a better business, and therefore, I shouldn't hold it," he explained.
The group wants to simplify its operational structure to "better enable a more efficient capital structure that is less dependent on cash balances but consequently also less dependent on such large funding facilities".
"We're going to sell businesses at the moment of about R1 billion worth of revenue that give me little to no profit. That's a big change to focus, delivery and upside. So we are going to have a much more focused business that's far more profitable; therefore, far more future-proofed," Van Coller added.
New group CFO Megan Pydigadu, who only started work at EOH on 15 January, said the company aims to reduce its debt-to-earnings ratio to 1-1.5 times.
The company, which had liabilities of R7.5 billion at the end of the six-month period, also plans to release cash out of debtors and is targeting the release of R1 billion over the next 12 to 18 months.
This as the group this week reported an interim headline loss per share of 973c, for the six months ended 31 January, compared to headline earnings per share of 314c the previous year. This resulted in a headline loss of R3.3 billion for the six months, while normalised revenue was flat at R8.194 billion.
Selling versus buying
The company has been acquisitive in the past but Van Coller, who only took over as CEO last September, says new acquisitions will only be considered when the company can get itself back into a position where it has a flexible balance sheet again.
"Three years ago they had a very flexible balance sheet. But there has been a downturn in the economy. I think there were also some mistakes made where they bought non-cash-generating businesses with debt. Now you have to repay the debt and the businesses are not generating the cash. So we are taking cash from other businesses to pay the debt down, which means they've got no money to invest effectively. So, we need to get that right and this is why you need this focus. Once you've got the debt back to a normal level, somewhere around the R2 billion worth of debt, then we are in a very different position," he said.
"At the moment, with the share price where it is, you also don't want to issue shares. But when I get the share price back up to a reasonable level, you can use a bit of shares, use a bit of cash and you can start acquiring again; that's what we've done well in the past."
Share price bounce
The JSE-listed company's share price has been in trouble over the past year, falling 41.55% over 12 months, but it rallied 55% higher on results day and was up by almost 13% again yesterday. The recent recovery has brought the market cap back up to above R4 billion but the stock is down by 73% over a five-year period.
"We are not a very liquid share; we've got five or six shareholders who control probably 70% to 80% of the stock and so it's a very illiquid base that actually trades," Van Coller explained.
"So, one has to be careful, because it's quite easy to short it and we have had a lot of shorts in the market. I mean, if you remember, when I joined, the share price went up 30% over two days. That's not because of me, I can promise you that. I'd love to say I'm that good but I'm not.
"But the point is, there were lots of shorts in the market and they get their bums kicked and that's exactly what's happened [this week]; lots of shorts in the market pushing the share price down and then as soon as the sentiment changes, they have to get out and then the share price goes back to a normal level."
He said his advice to investors would be that if you like the story, you have got to be a long-term investor.
"Don't think you're going to make money in the short-term because it's very difficult to predict because of the liquidity.
"Longer term, if we execute what I need to execute by the 31st of July [the company's year-end] and once we come out with our full year results in October, we will then start selling the story to a broader set of investors across Europe, potentially the US, to really get a decent free-float in the business so that we can get a real share price that people can get in and out of on a reasonable basis," he concluded.