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EOH (EOH) will be the stock in focus: (Price at time of writing: R146.59 as 30 March 2016)
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Background and overview of EOH
EOH is the largest technology service provider in South Africa. It has a wide range of Outsourcing, Cloud, Managed Services, Industrial Technologies and Business Process Outsourcing (‘BPO’) solutions. EOH’s 11 500 staff members deliver these services to over 5 000 large enterprise customers across all major industries. EOH has over 130 points of presence nationally and has a growing international footprint, with operations in over 40 countries outside of South Africa. EOH remains entrepreneurial despite its size, has a strong brand and is expanding into new products, services and territories
Scroll over or click on the funnel chart to get more details of EOHs latest financial results
Financial review:
EOH has been one of the darlings on the JSE over the last couple of years. With there share price showing massive gains during this period. Its share price increased 743% over the last 5 years. But questions regarding their growth (growth by acquisition) has been raised and the fear is that they are not able to grow the company organically, so they grow by acquisition. (Similar to the fears raised in the past regarding Famous Brands). Their current net profit margin is sitting around 7.7% which is pretty healthy. They are in an industry where it is pretty easy to enter the market to supply the kind of services they supply. Not easy to win contracts and build client relations though. So they are in a pretty healthy position.
The graphic below shows the contribution of EOH's operations they hold stakes in or own, to their turnover and profits.
From the graphic above its easy to see that most of their revenue is earned from their outsourcing activities, yet when profits before taxes are looked at, the contribution of the outsourcing component is lower, suggesting margins are squeezed in this division or that they own more profitable divisions. A large part of their "assets" is however goodwill and intangibles. One should be cautious about this as those valuations can swing wildly depending on the reputation and name and quality of services provided by the entity.
They dont have a lot of debt on their books, which is good as profits dont have to go towards paying off debt, They generate about R2.50 a share in cash, which is lower than their reported earnings per share. Pointing to money that is still outstanding to EOH. According to their balance sheet they have trade and other receivables in their books of over R3billion and its much higher than what they reported 12months earlier, or during their year end results 6months prior. Potential buyers of the share should be weary of this. EOH needs to ensure these amounts owing are paid to them on time.
They dont have a lot of debt on their books, which is good as profits dont have to go towards paying off debt, They generate about R2.50 a share in cash, which is lower than their reported earnings per share. Pointing to money that is still outstanding to EOH. According to their balance sheet they have trade and other receivables in their books of over R3billion and its much higher than what they reported 12months earlier, or during their year end results 6months prior. Potential buyers of the share should be weary of this. EOH needs to ensure these amounts owing are paid to them on time.
Valuation:
Based on EOH's financial results and their track record, we do feel its one to keep on ones watch list, however due to the ballooning trade and receivables on their books, we are worried EOH might not be able to collect all monies outstanding. Which hurts their valuation a bit. We value EOH between R130.10 and R132.28. We therefore feel they are a little expensive currently.
We use our Share Valuation Calculator as guide to valuing shares. We believe in value investing and our above mentioned share valuation is based on the underlying fundamentals and financial statements of the stock in question.
We use our Share Valuation Calculator as guide to valuing shares. We believe in value investing and our above mentioned share valuation is based on the underlying fundamentals and financial statements of the stock in question.
