Technology services firm EOH has blacklisted and suspended payments to 50 enterprise development partners that it says were involved in shady dealings.
This emerged this morning when the company announced its results for the year ended 31 July.
In its results, the JSE-listed EOH says ongoing weakness in the macro-economic environment, the ENSafrica investigation and the reputational impact of Microsoft cancelling its licence reseller agreement, as well as the delay in infrastructure projects in the Nextec business, led to depressed revenue and margin pressure for the 2019 financial year.
Additionally, it notes, the group has undergone a reassessment of its strategy which led to certain businesses being classified as discontinued operations and assets held for sale.
EOH’s revenue from continuing operations was R11.8 billion, down 2.6% (2018: R12.1 billion). Gross margin for the year was 20.1% compared to 28.3% in the prior year.
Public sector contracts
The company explains the margin was negatively impacted by the close of large multi-year public sector contracts and the closure of projects in the industrial technology area related to electrical infrastructure in the water sector.
Operating expenses after stripping out once-off items for both the 2018 and 2019 financial years saw costs decrease to R2.6 billion, the company notes.
Once-off items include impairment of assets of R2.2 billion, a R157 million IFRS 2 charge related to the BEE transaction with Lebashe and its subsidiaries, and settlements as well as provisions of R358 million.
Normalised EBITDA for the period amounted to R792 million. The impact of the previously discussed once-off items and impacts on gross margin resulted in a reduction in the profitability measures.
Headline loss per share and loss per share from continuing operations were 1 352c (2018: 728c) and 2 464c (2018: 1 277c), respectively.
“The past 12 months have been very difficult for EOH,” says CEO Stephen van Coller.
“We have spent extensive time focusing on cleaning up the business both from a governance and financial perspective, as well as understanding the group’s strategic capabilities. I have been impressed by the spirit of my colleagues who have worked tirelessly during this challenging period.
“While there is much still to do, the path is much clearer. In the short-term, we will focus on continuing to deleverage our balance sheet while implementing governance changes, and over the longer term, we remain steadfast in a vision of a more synergised and focused offering that is well-positioned to take advantage of the next wave of change in the ICT industry,” Van Coller says.
Legal challenges
EOH points out the blacklisting and suspension of partners comes after the conclusion of a probe by ENSafrica unearthed suspicious transactions worth about R1.2 billion.
However, in statement, EOH says this amount has since been modified to R935 million and includes transactions with no evidence of contracting or work done, valued at R665 million, loans written off of R90 million and overbilling valued at approximately R180 million.
“EOH has blacklisted and suspended payments to 50 enterprise development partners who were implicated in this activity,” says Van Coller.
He notes some of these partners have initiated legal challenges against the company, “however, EOH will robustly oppose legal challenges brought by such parties”.
According to EOH, the ENSafrica investigation team have also been able to confirm the key modus operandi that was utilised by the main perpetrators to commit wrongdoing at EOH which involved business partners and intermediaries.
It explains the further investigation has confirmed the main perpetrators of wrongdoing remain confined primarily to a small group of individuals in the public sector team.
Apart from this type of wrongdoing, EOH says the investigation has also identified various opportunistic incidents of fraud and theft to the prejudice of the organisation.
“This has resulted in the company initiating disciplinary measures which has led to the termination of employment relationships with a number of individuals,” says the JSE-listed firm.
“Based on further information identified from ongoing whistle-blower reports and the ongoing investigation, the ENSafrica team have assisted EOH in making further reports to the authorities in line with our statutory reporting obligations.
“We have provided extensive information to the Hawks and the FIC [Financial Intelligence Centre] and we are supporting and cooperating with the authorities. It is important to emphasise that EOH is actively pursuing criminal charges as a complainant against various individuals implicated in wrongdoing.”
EOH notes the investigation team is working closely with the authorities to ensure they are able to identify illicit money flows.
The company notes it has initiated legal processes to recover losses caused by the perpetrators of wrongdoing. Extensive work has already been conducted to simplify the corporate structure, implement robust risk management and mitigation initiatives, increase transparency, accountability and reporting, it adds.
“A bid governance process framework has been implemented which aims to promote ethical business practices (commission payments, gifts or any other incentives, as well as the use of sales agents or middlemen are prohibited when bidding for contracts,” says EOH.
With Microsoft announcing its cancellation of the EOH Channel Partner Agreement and the subsequent ENSafrica investigation which uncovered R1.2 billion of suspicious transactions, management’s efforts have been focused on ensuring the right leadership and governance structures are in place and that people are held accountable for what has transpired.
Non-core assets
At the half year, EOH set a target to raise R1 billion from the sale of non-core assets for the next 12 months.
The company says it has made good progress towards this target, having already realised approximately R523 million in sales in the 2019 financial year; the most significant of these being the sale of 70% of CCS to a strategic partner, RIB, for a consideration of R444 million.
The firm is also looking to build a more appropriate working capital structure. It explains that historically, there has been a lack of focus on working capital management with large tranches of cash tied up in debtors.
“At the half-year, a target was set to significantly reduce this balance. By 31 July 2019, the trade receivable balance decreased from R4.1 billion to R3.4 billion (before adjusting for current assets held for sale) with over R400 million realised from greater than 90 days at 31 January 2019.
“At 31 July 2019, the group was able to repay its bridge facility of R250 million taken out during the year and the debt balance decreased from R3.4 billion at 31 July 2018 to R3 billion at 31 July 2019.”
According to EOH, concerted attention has been paid to driving a more efficient approach to costs, the effects of which will only be observed in the 2020 financial year.
“We continue to explore opportunities for cost management in order to settle on the appropriate cost base for the business.”
On business transparency, EOH says the group has historically pursued an aggressive growth strategy underpinned by acquisitive growth and revenue and profitability being achieved with little regard or focus on the balance sheet.
As a result, it says, a detailed review of the balance sheet commenced at the half-year and continued into year-end.
The net asset value of the balance sheet reduced from R8.1 billion as previously reported at 31 July 2018 to R2 billion at 31 July 2019. This decrease included a restatement of the prior period.
Cash generated from operations after changes in working capital was R502 million (2018: R1.2 billion).
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