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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
At the release of EOH’s year-end results on 15 October 2019, EOH reported that it had identified three
operational themes that had prevailed during the period being reported on, namely:
- Creating more transparency on the business and financials.
- Creating a fit-for-purpose capital structure.
- Rebuilding credibility through establishing robust governance.
These themes have been retained as a backdrop for the update for the six month period which will end
on the 31 January 2020. This update is being provided before the Group enters its closed period from
that date until publication of EOH’s interim results ,which is expected to be on or about 7 April 2020.
Evolving business model
The business was configured into three key pillars, namely iOCO, NEXTEC and IP as part of an
evolving transition of the business to a sustainable future. Ultimately we will look to flatten the structure
and integrate ourselves into a single business unit.
Following a reassessment of the NEXTEC portfolio, certain business clusters have been moved out of
NEXTEC to run alongside iOCO, as detailed below. A review of the remaining businesses in NEXTEC
continues in order to ensure they are not a cash burden to the Group while the decision to sell, close or
retain these businesses is made. NEXTEC includes a wide variety of businesses (from infrastructure to
recruitment) all of which have different business drivers and risk profiles. While certain of these
companies require significant balance sheet utilisation and therefore are unlikely to form part of the
Group going forward, there are other businesses which have the potential to be capital light, market
leading businesses that could be value creative additional product offerings for the on-going core
business.
The IP portfolio consists of high potential platform companies ready for the next stage of scaling. The
sale of the whole or part of the Group’s IP businesses through strategic partnerships has made good
progress and form the key pillar to address capital structure.
Consequently, focus will increasingly be on growing the future core business of EOH. This is largely
made up of original iOCO businesses and comprises the following lines of business:
- the consulting and advisory client support business;
- the traditional ICT business including hardware and services, software, and ERP implementations;
- the networks and manage and operate businesses
- the application development, data and analytics intelligence and cloud advisory business; and
- the digital automation of industries, which was previously part of NEXTEC.
The core value proposition is that the business will be the preferred digital transformation partner for
clients due to its integrated capabilities and the skilled individuals at hand.
As part of the plan towards restoring stability into the core business, EOH has an ongoing process in
place in respect of legacy large scale public sector contracts. Of the legacy public sector contracts still
in place, 8 contracts out of 54 continue to have a negative impact on the financial performance of the
business. These contracts have a special focus where the operational and financial viability are managed
and tracked. Public sector business remains an important segment for the Group, noting this business
must be premised on sound contracting, project management and a collections focus.
Furthermore, in the period, iOCO achieved Managed Service Partner status with Google Cloud
following a rigorous technical capability assessment to demonstrate its abilities to design, build,
mitigate, test and operate a Google Cloud solution. This involved a formal third-party verification of
iOCO’s capabilities and is indicative of the inherent value within the iOCO business. iOCO has also
had its Amazon Web Services and Opentext certification renewed.
Cost Savings
Progress has been made in the implementation of cost saving initiatives primarily aimed at facilities
and overhead costs. This is to ensure the Group is rightsized, agile and efficient on a go forward basis.
The once-off advisory costs related to the continued ENSafrica investigation, disposals and
reorganisation of the business have continued over the last 6 months and together with legacy
settlements for poor contracting remain a drag on cashflow. However significant progress has been
made in this regard and these costs continue to taper off.
Capital structure
As part of EOH’s stated deleveraging strategy, the Group is considering all viable options to enable a
more fit for purpose capital structure appropriate for a large services business. This process is currently
focused on the sale of certain assets and the whole or part of the IP businesses to strategic partners over
the next 12 to 18 months. However the Group remains agile and engaged in this regard as an appropriate
capital structure is key to long term sustainability.
Asset disposals exceeded the stated R1 billion target
EOH continues to aggressively pursue disposals of its non-core assets and significant progress has been
made in this regard. As announced on 13 December 2019, over the 2019 calendar year, EOH exceeded
its stated target of achieving R1 billion in proceeds from disposals of non-core assets. This was primarily
achieved through the following disposals:
- 70% of Construction Computer Software (Pty) Ltd ("CCS") for a consideration of R444.4 million;
- 100% of the Data World group of companies for an aggregate consideration of R101.8 million;
- the disposal of Dental Information Systems Holdings (Pty) Ltd for R250 million, subject to various
suspensive conditions; and
- EOH's 49% shareholding in Twenty Third Century Systems (Pty) Ltd ("TTCS"), its 100%
shareholdings in Afon PTE Limited and iSquared Technologies (Pty) Ltd, its 51% shareholding in
Sukema IPco (Pty) Ltd and various others, with a combined consideration of R286.5 million.
Of the R1.1 billion gross consideration from the disposals, R87 million was in lieu of acquisition
warrant payments owed. Approximately R624 million of these proceeds has been received in cash over
the calendar year. Approximately R180 million of this relates to cash proceeds received during the first
half of the 2020 financial year. More than 75% of all cash proceeds received will be applied to the
settlement of debt and associated interest repayments as well as certain one-off costs.
Governance
EOH’s chairperson Dr Xolani Humphrey Mkhwanazi, sadly passed away on 4 January 2020. Dr
Mkhwanazi was appointed to the EOH board on 5 June 2019, as chairman and independent non-
executive director and will be sorely missed. Andrew Mthembu, currently EOH’s lead independent non-
executive director, has been appointed interim chairperson while the process to appoint a new
chairperson continues.
Following a tough but necessary forensic investigation, ENSafrica has concluded its investigation,
allowing EOH to focus on building the business. The board of directors has agreed ENSafrica’s
recommendation to pursue civil prosecutions against some of the perpetrators identified during the
forensic investigation. The board of directors has instructed ENSafrica to commence legal proceeding.
Recognising that EOH’s people are at the centre of the success of the Group, a number of key
appointments have been made across the business over the last 12 months. As part of integrating the
various businesses under a single executive committee, long standing EOH executives Tsepa
Ramoriting and Brian Harding have now joined the executive committee alongside Marius de la Rey
and Sean Bennett who hold the interim COO positions for iOCO and NEXTEC respectively. EOH now
has a strong and capable team that has started to deliver on the key business objectives of the Group.
Trading and financial update
Trading remains under pressure due to the weak macro environment which has resulted in companies
reducing their IT spend. Notwithstanding this, the core iOCO business, excluding the 8 poorly
contracted legacy public sector contracts, is tracking well with key clients being maintained. The
lingering effects of the 8 public sector legacy contracts still being exited have continued to have a
negative impact on performance.
The Group has committed to optimising overhead costs as well as to managing tax inefficiencies and
reducing the interest burden through the reduction in debt. Before adjusting for discontinued operations
and assets held for sale, cost savings are expected to be more than 20% against those of the prior year
and include the benefit of exiting more than 19 rental properties in the last 6 months.
During the period the Group made good progress in implementing a more robust cash management
system. This will ultimately reduce the need for the historically large and inefficient cash balances.
Cash balances are anticipated to be marginally lower than the prior reported period, mainly due to the
removal of cash for disposed assets. For the six month period, the Group expects the overall business
to have a positive operational cash trajectory, before one off costs, as the business starts turning.
Interim results
EOH will publish its interim results on or around 7 April 2020.
The financial information contained in this pre-closing stakeholder update has not been reviewed nor
reported on by the Group’s independent external auditors.
30 January 2020
Sponsor
Java Capital
Date: 30-01-2020 01:00:00
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