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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 539% 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 7.3% which is pretty healthy (even if its a little down on 6 months ago). They are in an industry where it is pretty easy to enter the market to supply the kind of services they supply. So barriers to entry is not very high. But it has to be said it is 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 IT services (and not outsourcing as per their previous valuation). IT services contributes just under 34% to Revenue and just over 34% to profit before taxes. Margins on software seems strong as it contributes 15% to Revenue but almost 25% to pre tax profits.
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 R6.93 a share in cash, compared to their earnings per share of R6.68. According to their balance sheet they have trade and other receivables in their books of over R3.4billion and its much higher than what they reported 12months earlier (R2.2billion). Potential buyers of the share should be weary of this. EOH needs to ensure these amounts owing are paid to them on time. From our last valuation it does not seem that EOH has done much to stem the flow. With trade and other receivables up from R3billion 6months ago, and R2.2billion, 12months ago.
EOH is paying R1.85 per share in dividends (placing them on a very low dividend yield of 1.2%), and at their current earnings per share it places them on a PE ratio of 22.9 (which we feel is high for EOH).
Below we will take a look at a few financial ratios for EOH:
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 R6.93 a share in cash, compared to their earnings per share of R6.68. According to their balance sheet they have trade and other receivables in their books of over R3.4billion and its much higher than what they reported 12months earlier (R2.2billion). Potential buyers of the share should be weary of this. EOH needs to ensure these amounts owing are paid to them on time. From our last valuation it does not seem that EOH has done much to stem the flow. With trade and other receivables up from R3billion 6months ago, and R2.2billion, 12months ago.
EOH is paying R1.85 per share in dividends (placing them on a very low dividend yield of 1.2%), and at their current earnings per share it places them on a PE ratio of 22.9 (which we feel is high for EOH).
Below we will take a look at a few financial ratios for EOH:
A few financial ratios for EOH (calculated using our Financial Ratios Calculator):
- Debt to Equity Ratio: 1 (more than 2 shows high levels of financial leverage).
- Current Ratio: 1.69 (a measure of liquidity. Less than one signals possible trouble in paying off current liabilities).
- Quick Ratio: 1.69 (Another liquidity measure. Shows how much in liquid assets is available to cover current liabilities or short term debt).
- Return on Assets (ROA): 7.05%
- Return on Equity (ROE): 14.13%
- Net Profit Margin: 7.29%
- Dividend Yield: 1.21%
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 R128.78 and R129.15. 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.