Hidden details in EOH’s financial results should concern investors

EOH’s latest financial results revealed a big increase in interest-bearing debt, which caused it to breach one of its debt covenants.

EOH’s results for the financial year through July 2024 showed that growth remains elusive despite the company’s big turnaround plans.

Revenue was down 3.1% to R6.0 billion, and its operating profit of R112 million was down 17% over the last year.

To put the company’s financial decline in perspective, EOH produced R16.3 billion in revenue and an operating profit of R977 million in 2018.

EOH reported a net loss of R66 million in 2024, 14% worse than last year. These continued net losses have taken a toll on the company’s debt.

The company’s interest-bearing increased from R840 million in 2023 to R960 million at the end of the 2024 financial year.

What should really concern investors is that EOH has breached one of its debt covenants with Standard Bank.

The debt covenant states that EOH’s debt should not exceed 2.75 times its EBITDA. It breached this covenant by having debt that was 3.28 times greater than its EBITDA.

Standard Bank agreed to waive this breach in the debt covenant, which prevented EOH from defaulting on its debt.

A different debt covenant restricts EOH from having an interest expense on debt greater than 2 times its EBIT (interest coverage ratio).

The group’s latest financial numbers stated that its EBIT is 2.11 times greater than its interest expense.

However, the group’s EBIT was R112 million, which is only 1.4 times greater than the interest expense related to these loans, which was R82 million.

The conflicting numbers are curious, and it is unclear how the EOH group defined this covenant.

EOH has pledged all of its wholly-owned South African subsidiaries, which contribute more than 85% of its EBITDA, as security for the covenant-related loans.

This means that if Standard Bank did not waive the breach in EOH’s debt covenants, the bank could lay claim to nearly the whole business.

This includes all shares, loan claims, cash, bank accounts, investments, claims, disposal proceeds, and other amounts owed by EOH’s most valuable subsidiaries.

It is clear that EOH’s turnaround strategy has not worked. After disposing of its most valuable assets to pay off debt, the company again finds itself in a major debt crisis.

What analysts say about EOH

David Shapiro from Sasfin Securities said the company has potential, but it faces significant headwinds.

“EOH should be flying, but there are obviously many troubles at the company,” Shapiro told Business Day TV.

“There are still many skeletons in the closet and other issues they cannot get rid of,” he said, adding that it is not a share he would invest in.

Wayne McCurrie from FNB Wealth and Investments said it is never a good sign when the highlight of a company’s results is that its loss is not as big as the previous year.

McCurrie said that while EOH provides critical IT services, it is a highly competitive market with many players battling for market share.

He credited the EOH management team for saving the company from a dismal position. However, he added that the share does not appeal to him.