Published Date: 2021-08-02 | Source: INCE|Community | Author: The Finance Ghost
EOH has an unusual reporting calendar with a year-end of July. The company has announced a pre-close update, which is a mechanism through which some companies choose to keep shareholders updated.
This is especially used by companies that are in a turnaround strategy, as no news is often assumed to be bad news!
It's worth recapping some of the points that were relevant in the six months to January 2021.
When a company is shrinking in order to pay down debt and hopefully emerge in better shape, profit margins become really important. Shrinking into profitability is a totally different strategy vs. growing into market dominance.
I therefore found it encouraging that the interim period to January 2021 saw improvement in gross margin (from 24.2% to 27.6%) and normalised EBITDA margin (7.8% to 8.3%). However, EOH was still loss-making overall, with headline loss per share of 60 cents per share (a major improvement on a loss of 350 cents per share in the comparable period).
On a segmental basis, the iOCO division contributed 68% of revenue and 82% of core normalised EBITDA, which is EOH's number that strips out once-offs and the impact of divisions that are expected to be closed.
The focus on margins and key divisional performance is because EOH needs to reduce debt and reduce it quickly. By January, the debt balance was around R2bn. The only way to deal with the balance sheet was to sell the remaining IP assets (Sybrin and Information System).
With the benefit of context, we can now take a deeper look at EOH's latest announcement.
Gross margin for the full year is expected to be between 26% and 28%, which suggests that the interim performance has been sustained at gross margin level. Another critical point is that EOH expects a positive operating profit and EBITDA for the full year, with the gap between normalised EBITDA and reported EBITDA continuing to narrow as the business stabilises.
The iOCO business (the largest division as discussed earlier) experienced a decline in revenue in the second half of the year as hardware sales came under pressure. EOH indicates that the pipeline is much stronger now due to re-entry into the public sector, which is why the recent issue with the State Information Technology Agency (SITA) put the EOH share price under considerable pressure.
The Nextec business focuses on business process outsourcing and intelligent infrastructure. EOH has indicated that the people solutions business has generated strong profits but the infrastructure solutions business has remained under pressure.
Before finance costs, EOH is profitable and generates free cash flow. Unfortunately, the debt balance is still R2bn while cash grew slightly from R588m in January to R605m by end-July.
The Sybrin disposal was only achieved at an EV/EBITDA multiple of 5.3x which isn't great in my view. EOH needs to bring down the debt balance and is running out of things to sell in order to achieve that.
EOH is down 22% year-to-date.
Disclosure: the author is a shareholder in EOH