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Pre-closing stakeholder update
EOH HOLDINGS LIMITED
(Incorporated in the Republic of South Africa)
(Registration number 1998/014669/06)
JSE share code: EOH ISIN: ZAE000071072
(“EOH” or “the Group”)
PRE-CLOSING STAKEHOLDER UPDATE
Update on building the EOH of the future
(i) Skilled and experienced executives in place to drive change
EOH has announced a number of leadership changes, both at the corporate holding company level and at an
operating company level, since Stephen van Coller’s appointment as Chief Executive Officer (“CEO”) in
September 2018. Xolani Mkhwanazi joined as the Chairman on 5 June 2019 and three new non-executives
were appointed on 18 July 2019. At a holding company level the board of directors (“Board”) is now fully
King IV compliant and well equipped to drive change in a responsible and transparent manner.
The newly constituted Board has been focused on addressing the issues raised in the ENSafrica forensic
investigation and has already met several times. Following the release of the Interim Report on 16 April 2019,
the Board is now turning its attention to the long term strategy of EOH and the reorganisation of the business
that management recently presented.
Stephen van Coller and Group Financial Director, Megan Pydigadu, have assumed a caretaking leadership
role for ICT and NEXTEC business units on an interim basis following the resignations of Rob Godlonton
and Zunaid Mayet.
Given the strength within management at a business unit level and the breadth of skills and expertise amongst
the 11,000 EOH employees EOH is confident of managing the reorganisation process and transition to new
management. An active change management programme is in development coupled with new remuneration
and incentives that directly relate to business imperatives.
(ii) Reorganisation to ensure core businesses remain competitive
At the interim results presentation on 16 April 2019 EOH outlined a strategy to focus the business on three
key pillars, namely ICT, NEXTEC and IP. On 26 July 2019 EOH re-launched the ICT business, which has
been renamed iOCO, and explained the new operating framework to key customers and employees. This
represents a key milestone in the internal reorganisation process, aimed at simplifying the ICT business,
integrating client offerings under one brand, driving governance imperatives and aligning the service delivery
model and offerings for the cloud economy and fourth industrial revolution.
Work on the NEXTEC strategy continues, including how iOCO, NEXTEC and the IP businesses will work
together to optimise value for EOH shareholders, with umbrella shared services being provided by EOH.
(iii) Governance
EOH provided an interim update on the detailed forensic investigation being undertaken by ENSafrica on
16 July 2019. EOH is committed to open engagement with all stakeholders and has outlined a number of next
steps that are being progressed.
(iv) Building a more appropriate capital structure
As part of the interim results announcement, EOH committed to realising cash from its debtor book which
amounted to R4.2 billion at the beginning of February 2019. As of mid-July 2019, the total debtors balance
has reduced to R3.6 billion and long outstanding debtors as at 31 January 2019 having realised R376 million
in cash. A further R300-400 million is expected to be realised from the long outstanding debtors over the next
six months. These funds were used to fund operational needs of mainly loss making assets on the closure or
sale lists.
EOH has already provided for more than 90% of the problematic debtors identified in the long outstanding
balances and the effect on the income statement of further write downs is expected to be relatively small, if
required.
The sales of non-core assets are making good progress with the Group having already achieved over 50% of
its targeted R1 billion of disposals to reduce debt levels.
- As announced on 1 July 2019, 70% of CCS was sold to RIB Limited for consideration of
R444.4 million. This transaction has closed.
- Agreements have been entered into for the disposal of EOH’s 49% shareholding in Twenty Third
Century Systems and its 100% shareholdings in Enablemed which are expected to close imminently,
as well as the sale of its 100% shareholdings in Afon and iSquared and its 51% shareholding in
Sukema, which have already closed, with a combined consideration of an additional approximately
R122 million.
Following receipt of the sale proceeds from the disposal of 70% of CCS, EOH has repaid the R250 million
bridge loan provided by its bankers and expects further progress with deleveraging in the coming months.
In addition, EOH is working to improve its balance sheet efficiency and is moving to rather pay down debt
than hold excessive cash balances. EOH expects to have availability of R400 million of its overdraft facilities,
reducing the historical debt levels, while still retaining a strong cash balance of approximately R700 million
expected at year end.
Trading and financial update
Trading conditions remain under pressure due to the weak macro environment. EOH has also been negatively
impacted due to concerns around governance at the company. Some improvement has been noted following
the release of the interim update on the forensic investigation being undertaken by ENSafrica on 16 July 2019
(“Interim Update”) as clients resume business with the Group, however, the benefits will not be realised
until after year end. This has resulted in revenue remaining under pressure which has increased further in the
second half of the year, in part due to one-off hardware sales not being repeated in the second half of the year.
Gross margin is expected to remain flat when compared to the first half of the year, before the impact of
discontinued businesses, including Construction Computer Software (Proprietary) Limited (“CCS”).
While a number of once-off advisory fees will impact the results the core challenge remains ensuring the cost
base is appropriate for the business. Work in this regard has started on larger line items such as facilities costs,
where good progress has been made, however more work will be required in the new year.
Significant progress has been made on initiatives relating to closures, and the sale of non-core assets, which
are reasonably advanced but will continue into the new financial year. The benefit of the initiatives will only
be seen in the next financial year. The drag on EBITDA from some of these businesses undergoing closure
has reduced meaningfully during the last six-month period when compared to the first six-month period.
The ongoing scrutiny of the balance sheet by management, supported by a full audit, is in progress. While the
majority of the write downs were made at half year, further write downs are anticipated, although these are
not expected to be of the magnitude of those made at the half year.
Improved working capital management and the closure of loss making entities are starting to show positive
benefits. The specific progress on debtors collections combined with and the execution of disposals have
resulted in sound deleveraging progress and are included in more detail above.
Full year results
EOH will publish its full year results on 15 October 2019 and will also provide a strategic update as well as
an update on the status of the ENSafrica forensic investigation.
The financial information contained in this pre-closing stakeholder update has not been reviewed nor reported
on by the Group’s independent external auditors.
Stephen van Coller said “It has been a challenging six-month period but the Group has made meaningful
progress on a number of fronts. I am pleased to have a new Board in place with experienced professionals
that can work with the executive team and I as we future-proof EOH. I have every confidence that the
fundamental strengths of the business and its people will prevail in the longer term notwithstanding the
pressures the business is facing.”
31 July 2019
Sponsor
Java Capital
Date: 01/08/2019 07:05:00
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