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How EOH plans to service R2.9bn debt burden

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Megan Pydigadu, EOH group finance director.
Megan Pydigadu, EOH group finance director.

JSE-listed technology services firm EOH is looking to deleverage its R2.9 billion debt burden in the next 18 months.

So said Megan Pydigadu, EOH group financial director, in a telephonic interview with ITWeb this morning after the company announced its interim results for the six months ended 31 January.

“Currently, we have R2.9 billion worth of debt and our aim is to deleverage by R1.5 billion, and we want to achieve this in the next 18 months,” said Pydigadu.

EOH’s problems surfaced after Microsoft in February last year terminated its contract with the IT services company after an anonymous whistle-blower filed a complaint with the US Securities and Exchange Commission about alleged malfeasance to do with a R120 million contract with the SA Department of Defence.

Ever since, the company has been trying to improve its image after corporate governance issues emerged following an investigation by ENSafrica, which unearthed suspicious transactions worth about R1.2 billion.

However, EOH later revised the figure to R935 million, including 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.

Asset clean sweep

“We do have a clear path of how we plan to achieve that deleverage which is really through the selling of assets. We have already launched the sale of two of our IP assets in December and we hope the assets will form a big part of the deleverage process that will happen over the next 18 months,” Pydigadu said.

“We have made progress on those two deals and we have another deal – Denis [Dental Information Systems Holdings] – which we announced recently that is currently sitting in the Competition Commission. We are expecting to get R250 million from the sale of that asset,” she noted.

“We believe that in the next 18 months, we should be sitting at a significantly different place from a debt perspective.

“We have also been inefficient when you look at our debt and cash. If you consider that we have R2.9 billion of debt and R900 million of cash, it’s effectively a net R2 billion debt that we are currently sitting with.”

According to Pydigadu, the loss for the business during the period was just under R1.2 billion.

She explained that these losses are attributable to some of the businesses that EOH has been trying to get rid of.

“We’ve got legacy issues in the business related to historical public sector contracts, as well as EPC [engineering, procurement and construction] contracts specifically in energy, water and rail space.

She said that counted for over R270 million of losses incurred during that period. “Also, we sold some assets and subsidiaries and we reported losses of just over R200 million in that regard. We also took impairment losses of R280 million, and that was largely against goodwill.

“We’ve also had some historical equity investments which have been largely offshore that we also impaired,” Pydigadu said.

In its results, EOH says total revenue decreased 21.8% (continuing 17.4%) to R6.4 billion (continuing R4.5 billion) when compared to the prior comparative period, mainly as a result of lower hardware and software sales, as well as legacy public sector enterprise resource planning implementation deals not repeated in the current period.

However, commenting on the major highlights, Pydigadu said: “For us, it’s really been the story about seeing the turnaround – the hard work we’ve been putting in to sort the business.”

She noted that some of the achievements are evidenced by the fact that the company now has stable revenue within its core business.

“Our gross profit margins were up 24% from 20% last year, so we are seeing that good efficiencies have been put through to our gross profit margins. We also have cash as from 2nd of April of R950 million; so from a liquidity perspective, we are feeling strong.

“If you look at the stuff that we have done over the last 19 months and more recently in the last six months, which is effectively from the period that Stephen [van Coller, CEO] and I started, we have repaid the lenders R1.5 billion of which R1 billion is cash and R500 million is interest,” she said.

The company has also sold over 40 businesses during this period for just under R1.2 billion and a lot of those were non-core and businesses that were making losses, she pointed out, adding that EOH has done a lot of clean-up in that perspective.

“One of the other things that we inherited, from a legacy perspective, is we had a whole lot of properties and recently got out of 26 leases, and, when annualised, we will see a R70 million saving as a result.

“The other legacy issue that we were dealing with is that we had a lot of legal entities – over 270 legal entities – when we joined, and we have reduced that down to 181. A lot of that has been from selling of non-core businesses and also deregistering businesses that were dormant.”

But the most encouraging aspect has been around the iOCO core business, Pydigadu said. “That business has performed particularly well and if you look at it, we had close to R3 billion worth of revenue from it for the six months.

“It had EBITDA [earnings before interest, tax, depreciation and amortisation] of R374 million and margin of 12.5% EBITDA. So that core business has performed very well.”

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