Investors dumped EOH shares ahead of its R600 million rights issue as the company’s latest financial results showed a huge EBITDA decline and a swing back to an operating loss.
On Tuesday, EOH released a pre-closing stakeholder update for the six months ending 31 January 2023 and the proposed capital raise.
What stood out in its update was that the company swung back to an operating loss in the second half of 2022.
When EOH released its annual results in October 2022, it told investors it achieved “sustained operating profitability during the year ended 31 July 2022.”
EOH did not tell investors that most of the good news was based on the results in the first half of the financial year.
The latest financial update showed that EOH’s financial performance deteriorated significantly in the second half of 2022.
Operating profit declined by 138%, adjusted EBITDA was down 69%, and net finance costs increased slightly.
What is of particular concern is that EOH has historically performed better in H2 than in H1.
EOH blamed challenges in Nextec’s Infrastructure Solutions and iOCO’s software reseller and enterprise applications divisions for the poor financial performance.
The company said it has taken action to address the specific iOCO and Nextec challenges and is now operationally well-positioned to produce improved results for the full 2023 financial year.
Investors were not convinced. The EOH share price was down over 5% on the day and declined 40% over the last four months.
|R million||2022 H1 continuing||2022 H2 continuing||Change|
|Revenue||2 980||3 051||+2%|
|Net finance costs||(92)||(98)||-7%|
Declining revenue and equity
EOH has been struggling in recent years as it has lost many of its revenue-generating assets through disposals to reduce its big debt burden.
The company’s management team has been criticised for selling its most valuable subsidiaries at a fraction of their market value, destroying the company’s revenue-generating capabilities.
The company’s financials have supported these accusations, as its assets have declined much faster than its liabilities.
The decline in equity is due to losses from selling the assets at lower than book value prices.
EOH is now on the brink of becoming technically insolvent – a situation where the company’s liabilities exceed its assets.
The loss of assets has taken its toll on the company’s revenue generation capability.
The loss in valuable assets is apparent in its historic interim revenues taking a sharp dive from the second half of 2019.
Investors are now waiting for the final details of the company’s rights offer, which is expected on 19 January 2023.
EOH is planning to raise R600 million through a R500 million rights offer and a R100 million specific stock issue to Lebashe Investment Group.
The company noted that the R600 million would help it to stabilise its operations and position itself for future growth.
Investors are now faced with the option of exercising their rights and placing their trust in the EOH management to grow the company, or significantly diluting their stock holding.
Many investors have, however, lost trust in the EOH management to deliver on their promise of turning the company back to profitability and have sold their shares.
Over the last year, EOH’s share price declined by 50%. Most of the decline happened after the company announced its rights issue.