Tech Firm EOH Narrows Headline Loss as Turnaround Plan Starts to Pay Off

Significant progress has been made in closing out the previously disclosed problematic legacy contracts.

EOH turnaround plan is slowly starting to pay off as the JSE-listed technology group narrows headline loss for the six months ended 31 January 2021.

The company said total headline loss per share (HEPS) improved by 83%, with losses narrowing from 350 cents per share to 60 cents per share. HEPS is South Africa’s main profit gauge.

EOH said it is making a headline loss because of its over-indebted capital structure and inefficient legal entity structure. The management team continues to address this as a core focus area.

Revenue was R4.4-billion, from R6.2-billion in the prior six-month period, EOH said.

EOH has seen progress in its key strategic initiatives, including optimising the cost structure and capital structure and focusing on earnings quality. The benefit of this can be seen through the sustained and continued improvement in margins and the return to an operating profit.

Deleveraging and proactively engaging with lenders remains a strategic priority for EOH.

Year-to-date, EOH said it had repaid the lenders a further R433 million principally from disposal proceeds. This brings the total legacy debt reduction since July 2018, including vendors for acquisition liabilities (VFAs), to R2 billion from R4 billion.

“We anticipate this to reduce further as we conclude the sale of the two largest IP businesses, namely Sybrin and Information Services,” the company said.

The company also generated a positive operating profit of R59 million compared to a R915 million operating loss in the prior period. Total gross profit margin increased to 27.6% from 24.2% for the previous period.

Total core normalised EBITDA of R363 million representing a 0.5% increase in EBITDA margin to 8.3%.

“Our business, while smaller from a revenue perspective due to the strategic disposal of non-core assets and exit of under-performing businesses, is now a more sustainable business delivering better quality of earnings,” Stephen van Coller, CEO of EOH.

“We have seen a significant reduction in one-off costs and are confident that our legacy issues are now under control. The local and global economy remains constrained as we have seen the negative impact on some of our clients.

“However, we have also seen increased cloud uptake and spend on automation and application development in line with global trends since the beginning of the pandemic. Over the coming months, our focus will be on deleveraging, enhancing margins and remaining antifragile.”

Legacy contracts

Significant progress has been made in closing out the previously disclosed problematic legacy contracts.

Five of the eight problematic public sector contracts have been settled, with one having been ceded to a sub-contractor with settlement currently in arbitration, another concluding at the end of April 2021 and one that has been terminated with handover discussions currently underway.

“We anticipate that all these contracts will be satisfactorily closed out by the end of the current financial year,” EOH said.

With respect to the overbilling uncovered in the ENSafrica investigation, EOH has settled with the Special Investigating Unit (SIU) on the Department of Defence contracts and has begun repayment. Furthermore, final negotiations with the SIU on the Department of Water and Sanitation contracts are underway and it is anticipated that settlement will take place in H2 2021. “This will bring to a conclusion the overbilling issues.”

Following the sale of the two remaining IP assets, EOH will be substantially relieved of the onerous legacy debt burden it has been carrying.

Over the past two years, the management team has prioritised consolidating the group’s legal entity structures, optimising the business through non-core disposals, paying down legacy debt and refinancing.

“Significant progress has been made on these initiatives and the group anticipates it will have the optimal business structure and model to begin executing on its growth plans towards the end of H2 2021.”

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