Prominent analysts and fund managers said it is difficult to build an investment case for EOH because of uncertainty about its earnings and looming rights issue.
EOH released its financial results for the year ended 31 July 2022 recently, which showed a decline in revenue to R6 billion and a loss for the year from continuing operations of R160 million.
EOH is also on the brink of technical insolvency, with its debt ratio at dangerously high levels and a shrinking asset base.
To address its debt, EOH intends to go to the market to raise up to R600 million through a R500 million rights issue and a R100 million BBBEE deal.
EOH CEO Stephen van Coller said the rights issue would leave the company with a fit-for-purpose capital structure and allow them to focus on growth.
It raises the question of whether EOH is a good investment at these levels, considering its share price declined 98% over the last six years.
Rowan Williams from Nitrogen Fund Managers is not convinced, saying permanent damage was done to the business and its prospects.
Its brand and market position suffered, and as part of building a new balance sheet, EOH sold many assets and reduced the size of the business.
“They have done a good job at cleaning up the business, but they have to reduce their overheads because EOH is now a much smaller business,” he said.
Protea Capital Management founder and CEO Jean Pierre Verster said it is difficult to assess EOH because of uncertainty about normal earnings.
He explained that the current earnings might not be sustainable. “EOH has a lot of once-offs in their earnings, which makes it difficult to know what the sustainable earnings are,” Verster explained.
Another concern is that the rights issue can cause significant dilution. “It could be that the number of outstanding shares doubles which will be highly dilutive,” he said.
Verster said he would wait until the price of the rights issue is announced before assessing whether it is a good buy.
“It is important to see how much dilution there will be and get a feel for the normal sustainable earnings,” he said.
“Until that point, EOH is like a dead man walking – the share price will just putter along as people wait for the rights issue to come.”
EOH said details about its rights issue would be posted to shareholders on 14 November 2022.