EOH’s share price plummeted by 30% following the release of its annual results and details about its planned rights issue.
On 26 October, after the markets closed, EOH released its financial results for the year ended 31 July 2022 and its annual integrated report.
EOH tried to position the latest results as a turnaround story, with a 92% increase in operating profit and a 91% improvement in total loss per share.
However, delving deeper into EOH’s numbers revealed that all was not well at the company.
Over the last four years, revenue declined by 63% from R16.3 billion to R6.0 billion, and operating profit declined 84% from R977 million to R159 million.
The biggest concern was the decline in net equity, which plummeted 99% from R8.1 billion to R60 million.
The big decline in net equity shows tremendous value destruction at EOH over the last four years, and it is now on the verge of technical insolvency.
To address the dismal state of its balance sheet, EOH is planning to raise up to R600 million through a R500 million rights issue and a R100 million BBBEE deal.
The proceeds will be used to settle most of the bridge facility, and EOH believes it will leave it with a sustainable capital structure.
What this rights issue means for existing shareholders is that they must either give EOH more money or face significant dilution.
EOH provided three scenarios regarding the planned rights issue with different discounts to the theoretical ex-rights price (TERP).
- The rights offer price and the subscription price equating to a 20% discount to TERP on the last practicable date.
- The rights offer price and the subscription price equating to a 30% discount to TERP on the last practicable date.
- The rights offer price and the subscription price equating to a 40% discount to TERP on the last practicable date.
In all these scenarios, there is tremendous dilution for existing shareholders who do not subscribe to the rights offer.
It tested the trust that investors have in the company and its management to create shareholder value, and the message from the market was not positive.
EOH shareholders dumped their stock ahead of the rights offer, signalling that they do not believe they will receive value – even at a significant discount.
It is not surprising. When EOH’s top management was asked why they did not buy EOH shares if they believed in the turnaround, they preferred not to answer the question.
If EOH’s management is not willing to pump their life savings into the company, believing it will provide great returns, it is difficult to ask other investors to believe the turnaround story.