EOH on the verge of technical insolvency

EOH is on the brink of technical insolvency, with its debt ratio at dangerously high levels and plummeting revenue.

This concerning situation was revealed in EOH’s financial results release for the year ended 31 July 2022.

The group’s revenue declined from R6.5 billion to R6.0 billion, but it was able to narrow its loss for the year from R288 million in 2021 to R100 million in 2022.

A big focus point for EOH CEO Stephen van Coller was cutting debt from R2 billion at the end of January 2022 to R1.3 billion at the end of the financial year.

The de-leveraging strategy started after the company suffered tremendous reputational damage after reports of corruption, bribes, and malfeasance surfaced about the company.

EOH sold numerous non-core and non-performing businesses and used to money to reduce its debt and return to profitability.

Among others, it sold Syntell for R211 million in November 2020 and Sybrin in June 2021 for R344 million.

EOH also cut its operating expenditures by exiting 151 of its properties since 2019, not renewing contracts, and reducing its headcount.

According to its 2022 financial report, the de-leveraging strategy remains centred on the disposal of EOH’s remaining IP assets and cost-saving measures.

EOH managed to reduce its interest-bearing debt to R1.33 billion in FY2022 from R4 billion in FY2018, showing good progress in ridding itself of its debt burden.

However, it came at a cost. EOH’s asset base reduced faster than its liabilities which means the company is on the verge of technical insolvency.

A group of former EOH employees and shareholders, calling themselves Save EOH, criticised Van Coller’s strategy for gutting the company and destroying jobs.

“Van Coller disposed of 60 businesses indiscriminately, including all of the most valuable, profitable, and cash generative ‘crown jewels’ of EOH for a small fraction of their value,” Save EOH said.

They said one of EOH’s greatest assets, Construction Computer Software (CCS), was sold to a German company for 25% of its actual value.

Their accusations are substantiated by EOH’s shrinking gap between its assets and its liabilities.

Another way to visualise EOH’s assets and liabilities is its debt ratio.

The debt ratio is the ratio of total liabilities to total assets, expressed as a decimal or percentage showing the extent of a company’s leverage.

Dividing total liabilities by total assets shows the proportion of a company’s assets which are financed through debt.

In EOH’s case, this ratio has been creeping up to close to 100% in recent years. Should it exceed 100%, the company will become technically insolvent.

Daily Investor asked EOH about its high debt ratio and shrinking asset base, but the company preferred not to discuss the issue.

When assets are disposed of to cover debt, companies can easily face liquidity issues. It is because large and illiquid assets are often sold at a discount to their book value.

When many assets are disposed of in this manner to settle debt, the company’s asset base decreases at a quicker pace than its debt.

Another difficulty with asset disposals is that they decrease a company’s operations, leading to market share loss.

A good measure of market share is revenue. In EOH’s case, revenue plummeted over the last five years.

In 2017, EOH was a big player in South Africa’s ICT market, with revenue of R15 billion. The company is now a shadow of its former self, with revenue of only R6 billion.

Some good news for investors is that EOH has made meaningful strides toward becoming profitable.

It was able to shrink the company’s net loss from R4.95 billion in 2019 to R100 million in the last financial year.

EOH is focused on further reducing its debt burden and growing revenue through its existing operations.

To address its debt burden, EOH will go to the market to raise up to R600 million through a R500 million rights issue and an additional R100 million BBBEE deal.

The proceeds will be used to settle the majority of the bridge facility. EOH said it would leave it with a “fit for purpose capital structure”.

“The capital raise will allow management and staff to focus on EOH’s exciting growth potential,” the company said.

EOH’s growth engines include:

• iOCO Digital, which taps into the 4IR market trends.
• iOCO Operational Technologies, which aligns with the rapid growth area of the OT/IT intersection and opportunities in East and West Africa.
• IOCO Infrastructure Services creates a platform for clients to outsource their IT infrastructure.

“All of these businesses are currently significant contributors to both revenue and profit,” EOH said.

It added that its IP companies are the foundation of future growth potential as they are ready for local and geographic expansion and scaling.

“They will be housed together under Rocketlab Ventures to allow separate partnerships and investment as appropriate,” it said.