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EOH interim financial results for the period ending 31 January 2019
Date: 16 April 2019 Category: Stock Market Share Price: R16.70 |
Related Topics |
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EOH shares are being battered after it emerged that Microsoft is ending EOH's Channel partner agreement. And this for a stock that was already under pressure due to some of their directors being linked to companies with shady dealings. Not good for the company and its share price.
So what does the group's latest financial results look like? |
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About EOH
EOH is the largest technology services company in Africa and has a wide range of solutions in Industry Consulting, IT Services, Software, Industrial Technologies and Business Process Outsourcing.
EOH's 11 000 staff members deliver these services to over 2 500 large enterprise customers across all major industries throughout South Africa, Africa and the Middle East. EOH is present in 134 locations in South Africa, and has a growing international footprint with 30 points of presence. As a proudly South African business, EOH is committed to sustainable transformation, making a positive, meaningful contribution to society, and is a Level 1 Broad-based Black Economic Empowerment (BBBEE) contributor.
The EOH Purpose
To provide the technology, knowledge, skills and organisational ability critical to the development and growth of the markets we serve. To be an ethical and relevant force for good and to play a positive role in society, beyond normal business practice.
EOH's 11 000 staff members deliver these services to over 2 500 large enterprise customers across all major industries throughout South Africa, Africa and the Middle East. EOH is present in 134 locations in South Africa, and has a growing international footprint with 30 points of presence. As a proudly South African business, EOH is committed to sustainable transformation, making a positive, meaningful contribution to society, and is a Level 1 Broad-based Black Economic Empowerment (BBBEE) contributor.
The EOH Purpose
To provide the technology, knowledge, skills and organisational ability critical to the development and growth of the markets we serve. To be an ethical and relevant force for good and to play a positive role in society, beyond normal business practice.
Key financial indicators
So the key financial indicators and features of their latest results as published by the group:
- EOH remains an integral technology partner for major South African corporates as well as key metros and government departments.
- New leadership appointed which has:
- initiated a significant internal governance review and undertaken remedial action; and
- conducted an extensive group-wide strategic and balance sheet review.
- Meaningful progress made towards addressing legacy governance issues, future-proofing the business and aligning financial performance.
Key financial indicators:
- Normalised revenue - R8 194 million (R8 193 million)
- Normalised EBITDA - R387 million (R1 088 million)
- Available cash of R957 million (R1 418 million)
- Net asset value of R4 574 million
Now for a few of the numbers that we are interested in:
- EOH remains an integral technology partner for major South African corporates as well as key metros and government departments.
- New leadership appointed which has:
- initiated a significant internal governance review and undertaken remedial action; and
- conducted an extensive group-wide strategic and balance sheet review.
- Meaningful progress made towards addressing legacy governance issues, future-proofing the business and aligning financial performance.
Key financial indicators:
- Normalised revenue - R8 194 million (R8 193 million)
- Normalised EBITDA - R387 million (R1 088 million)
- Available cash of R957 million (R1 418 million)
- Net asset value of R4 574 million
Now for a few of the numbers that we are interested in:
- Revenue from continuing operations: R8.4 billion
- Cost of sales: R6.76billion
- Gross profit: R1.67 billion
- Loss for period: -R3.27 billion (largely due to large scale impairments which was carried through the income statement).
- Diluted headline loss per share: -R9.93 per share (largely due to large scale impairments which was carried through the income statement).
- Cash generated from operations: R82.3 million
- Cash generated per share: 51.9c a share
- Net asset value per share: R28.94 a share (so trading well below its stated net asset value). So either the market is not trusting the reported net asset value, or soemthing else is going on, and as we know from our EOH/Microsoft page they have been in the news for all the wrong reasons and this lead to significant share price declines, to levels well below their stated net asset value
- Cash and equivalents: R957 million
- Cash and equivalents per share: R6.05 (or 36% of the share price)
Management commentary on EOH's results
The period under review marks the dawn of a new era for EOH. The appointment of key executive team members, including a new Group CEO and CFO, a revitalised strategic intent and transparent approach have greatly assisted the Group in navigating its way through the challenges to date and to set the direction for the future. An extensive Group-wide strategic review identified the need to refocus the businesses, including the identification and ultimate elevation of the IP businesses.
Meaningful progress has been made on implementing this as well as towards addressing legacy governance issues, future-proofing the business and aligning strategic and financial performance. While much of the execution to create focus and additional liquidity is yet to be concluded, EOH is well positioned to commence the process.
The Group remains committed to ethical leadership and robust and transparent governance practices. EOH has a zero-tolerance approach to unethical or fraudulent business practices and is committed to removing any such activities in a responsible and effective manner. The building of a sustainable, agile and competitive EOH includes preserving the future of the business, the country and the jobs of the talented and hardworking people at EOH.
A turnaround of EOH is imperative for driving South Africa's fourth industrial revolution. EOH is supported by the leading talent in the technology industry. It remains an imperative to ensure that the conduct of a few individuals, who may have been implicated in any wrongdoing, does not taint the 11 000 strong committed workforce. EOH has been in ongoing communication with clients and feedback has overwhelmingly been that their relationships with EOH are long term in nature and that the service they continue to receive is of the highest standards.
Notwithstanding the ongoing challenges, from a financial perspective:
- Revenue remains stable at R8 428 million and operating costs remain flat, after the removal of once-off items;
- Normalised EBITDA from continuing operations for H1 2019 is R387 million;
- The net asset value of the Group is R4 574 million, including cash of R957 million as at 31 January 2019; and
- The net asset value of the Group remains substantially above the market capitalisation of R1 855 million.
Building the EOH of the future
These last six months, including events post-period end, have been extremely challenging for the Group. In addition to difficult trading conditions, EOH has been the subject of ongoing governance allegations, compounded by Microsoft cancelling its Channel Partner Agreement. This has accelerated shareholder value destruction and raised further questions about historic governance practices. With assistance from professional advisory firms, management has instituted a full assessment in terms of the Group's compliance, governance and capital structures.
Business performance
The combination of a continued, stressed macro-economic environment and close out of discontinuing projects, combined with the poor performance from the Middle East and Africa Enterprise Resource Planning ('ERP') business have negatively affected the results for the six months ended 31 January 2019. EOH's revenue from operations remained stable at R8 428 million (2018: R8 354 million). Revenue has been under pressure in both the International ERP implementation business due to a slowdown in project awards and also a slowdown in the NEXTEC Industrial Engineering sector where there have been delays in the commencement of infrastructure projects.
Outlook
The Group expects the remainder of the 2019 financial year to be under pressure as a result of a slow-down in the economy, the delay of large infrastructure projects and the resultant Group reorganisation as a result of the new adopted strategy.
Meaningful progress has been made on implementing this as well as towards addressing legacy governance issues, future-proofing the business and aligning strategic and financial performance. While much of the execution to create focus and additional liquidity is yet to be concluded, EOH is well positioned to commence the process.
The Group remains committed to ethical leadership and robust and transparent governance practices. EOH has a zero-tolerance approach to unethical or fraudulent business practices and is committed to removing any such activities in a responsible and effective manner. The building of a sustainable, agile and competitive EOH includes preserving the future of the business, the country and the jobs of the talented and hardworking people at EOH.
A turnaround of EOH is imperative for driving South Africa's fourth industrial revolution. EOH is supported by the leading talent in the technology industry. It remains an imperative to ensure that the conduct of a few individuals, who may have been implicated in any wrongdoing, does not taint the 11 000 strong committed workforce. EOH has been in ongoing communication with clients and feedback has overwhelmingly been that their relationships with EOH are long term in nature and that the service they continue to receive is of the highest standards.
Notwithstanding the ongoing challenges, from a financial perspective:
- Revenue remains stable at R8 428 million and operating costs remain flat, after the removal of once-off items;
- Normalised EBITDA from continuing operations for H1 2019 is R387 million;
- The net asset value of the Group is R4 574 million, including cash of R957 million as at 31 January 2019; and
- The net asset value of the Group remains substantially above the market capitalisation of R1 855 million.
Building the EOH of the future
These last six months, including events post-period end, have been extremely challenging for the Group. In addition to difficult trading conditions, EOH has been the subject of ongoing governance allegations, compounded by Microsoft cancelling its Channel Partner Agreement. This has accelerated shareholder value destruction and raised further questions about historic governance practices. With assistance from professional advisory firms, management has instituted a full assessment in terms of the Group's compliance, governance and capital structures.
Business performance
The combination of a continued, stressed macro-economic environment and close out of discontinuing projects, combined with the poor performance from the Middle East and Africa Enterprise Resource Planning ('ERP') business have negatively affected the results for the six months ended 31 January 2019. EOH's revenue from operations remained stable at R8 428 million (2018: R8 354 million). Revenue has been under pressure in both the International ERP implementation business due to a slowdown in project awards and also a slowdown in the NEXTEC Industrial Engineering sector where there have been delays in the commencement of infrastructure projects.
Outlook
The Group expects the remainder of the 2019 financial year to be under pressure as a result of a slow-down in the economy, the delay of large infrastructure projects and the resultant Group reorganisation as a result of the new adopted strategy.
Share price performance of EOH over the last year reads like a horror story
The image below is a screenshot taken from Sharenet, showing EOH (EOH) share price performance for the last 12 months, and also the returns offered over longer periods such as 3 and 5 years. And as it shows, it is not a pretty story for EOH investors.
The summary below provides the share price return of EOH over various time periods:
- 1 day (yesterday): 14.04%
- 1 week: 23.9%
- Month to date (MTD): 25%
- 1 year: -70.6%
- 3 years:-90.67%
- 5 years: -84.3%
EOH (EOH) share valuation
To be honest we are not to keen on providing a valuation on EOH based on their current issues that they are involved and embroiled in and would much rather comment once all of this has been cleared up. But we will provide a valuation on EOH based on the latest results released. We currently value EOH shares at R22.8 a share, a little bit below their stated net asset value. Part of the reason for this is the fact that a large chunk of their net assets is made up by goodwill. In fact goodwill according to their books is worth R3.185 billion (down a whopping R1.2 billion from a year ago). And with that in mind and all their present issues, who is to say the total value of their goodwill wont decline further pushing their stated net asset value down. But there is some positives in the results, and cash makes up a fair chunk of the current share price, and their is a bit of cash being generated by the group. And when we throw all things thinks into our pot, we value the group at R22.80 a share, with a massive disclaimer that we advise investors to be VERY cautious around EOH shares. And that we would have preferred not to do a valuation until all the business ethics issues and full impact of Microsoft Channel agreement being cancelled has filtered through