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Eight public sector contracts give EOH headaches

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IT services company EOH has revealed that eight public sector contracts are continuing to negatively impact on its financial performance.

This emerged in a trading update from EOH today ahead of its interim results due on or around 7 April.

EOH has had several challenges during the past year, with an ENSAfrica investigation into the company finding evidence of a number of governance failings and wrongdoing.

The IT services firm requested ENSAfrica to conduct a proactive comprehensive investigation into EOH contracts to identify any wrongdoing or criminal conduct in the acquisition, award or execution of contracts.

At the time, the probe found R1.2 billion worth of suspicious transactions at EOH. The transactions mostly involved public sector contracts.

The company then went on to say it was looking to “ring-fence” its problematic contracts into a single entity before blacklisting 50 corruption-tainted entities within the group.

In a statement today, the JSE-listed company says: “As part of the plan towards restoring stability into the core business, EOH has an ongoing process in place in respect of legacy large-scale public sector contracts.

“Of the legacy public sector contracts still in place, eight contracts out of 54 continue to have a negative impact on the financial performance of the business. These contracts have a special focus where the operational and financial viability are managed and tracked.”

Nonetheless, it did not give details of these contacts, but last year the company said EOH Mthombo, the subsidiary that was largely implicated in the suspicious public sector payments, will be closed within two years.

However, EOH says public sector business remains an important segment for the group, noting this business must be premised on sound contracting, project management and a collections focus.

It adds that trading remains under pressure due to the weak macro environment, which has resulted in companies reducing their IT spend.

Notwithstanding this, EOH says the core iOCO business, excluding the eight poorly contracted legacy public sector contracts, is tracking well with key clients being maintained.

“The lingering effects of the eight public sector legacy contracts still being exited have continued to have a negative impact on performance.”

Besides, EOH says it is evolving its business model. It points out that the business was configured into three key pillars, namely iOCO, NEXTEC and IP, as part of an evolving transition of the business to a sustainable future.

“Ultimately, we will look to flatten the structure and integrate ourselves into a single business unit. Following a reassessment of the NEXTEC portfolio, certain business clusters have been moved out of NEXTEC to run alongside iOCO.”

It points out that a review of the remaining businesses in NEXTEC continues in order to ensure they are not a cash burden to the group while the decision to sell, close or retain these businesses is made.

EOH says progress has been made in the implementation of cost-saving initiatives primarily aimed at facilities and overhead costs.

This is to ensure the group is right-sized, agile and efficient on a go-forward basis, says the company.

It points out that the once-off advisory costs related to the continued ENSafrica investigation, disposals and re-organisation of the business have continued over the last six months and together with legacy settlements for poor contracting remain a drag on cashflow.

EOH adds it continues to aggressively pursue disposals of its non-core assets and significant progress has been made in this regard.

“As announced on 13 December 2019, over the 2019 calendar year, EOH exceeded its stated target of achieving R1 billion in proceeds from disposals of non-core assets.

“Following a tough but necessary forensic investigation, ENSafrica has concluded its investigation, allowing EOH to focus on building the business.”

The company says the board of directors has agreed with ENSafrica’s recommendation to pursue civil prosecutions against some of the perpetrators identified during the forensic investigation. The board of directors has instructed ENSafrica to commence legal proceedings.

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