September 22, 2023

Y M L P-310

Happiness is a Cigar

EOH rights issue to be addressed at AGM

EOH rights issue to be addressed at AGM

You can also listen to this podcast on iono here.

FIFI PETERS: IT group EOH has a really important date with its shareholders tomorrow [Tuesday, 13 December]. It is the company’s annual general meeting, and it’s planning to ask its shareholders for permission to do a few things, including raising about R500 million to R600 million on the market through issuing new shares. It’s something called a rights issue. It’s a cheaper form of raising money for a company [than] going to a bank, but it’s not always the ideal situation for a shareholder, as a rights issue can dilute the position of existing shareholders, and it also presents an opportunity cost for investors who choose to follow their rights, because they could have done something else with the money.

But here to tell us how he is planning to serenade his shareholders is the CEO of EOH, Stephen van Coller.

Stephen, thanks so much for your time and for your patience with us. Just to begin, it’s been a couple of weeks since you first announced to the market that you’d be calling on your shareholders for help, and I’d like to understand, first off, how you are feeling about tomorrow’s meeting, and how confident you are that you’ll get the support to raise the money you need?

STEPHEN VAN COLLER: Thanks very much. I really appreciate the time. Just to be clear, we announced that we would be raising capital at the end of January this year. It was a requirement of the bank, so it’s been in the market for some time and that’s created a bit of an overhang on the share.

Also, just from shareholders, remember going back to 2019 we had effectively about R5 billion worth of debt and acquisition finance and licensing fees and bank debt that we had to pay back.

Part of the strategy with the shareholder and the board was we’d first sell some assets until we got to a point where we felt that there was an investment case for EOH, then we would return to them – because it’s their company – to make a decision. If you saw our year-end results, we made a R282 million operating profit from almost R6 billion worth of turnover.

The board feels that the company is now investible because that was 91% better than in 2021. And so this was part of the plan.

It’s taken – obviously with Covid and [the KZN] floods, the Ukraine war and rioting – us three years to get here, but we are here now and shareholders must take the decision.

FIFI PETERS: I’m glad you mentioned the overhang in your share price since you did announce to the markets that you could be embarking on the route of a rights issue.

I was checking and I see that the stock price is down 37% in the past year, down 68% in the past three years, and down around 92% in the past five years, according to the data I was looking at.

So the question is: in hindsight do you think you waited too long to pursue the rights issue, given what your share price has done and the volatility probably in the market, which hasn’t added to the rating of your stock right now?

STEPHEN VAN COLLER: Yes, it’s a great question. The issue is I don’t think you can go to shareholders for more money unless you can tell them that there is an investible case that they can have a look at. Until now we haven’t had an investible case. We’ve still been cleaning up, changing, selling, getting everything into a shape that you could actually go to people and say, look at this company, this is what it’s really like.

The share price is a bit of an anomaly because as we were cleaning up you didn’t know what was going to come out of the woodwork.

You didn’t know how much you were going to have to settle with the SIU [Special Investigating Unit], where customers were going to go, etc. So it was very difficult. I don’t think it would’ve been possible in the past two to three years to do that. Certainly that was the board’s view.

And given that we owed so much money to the banks, we had to put a plan in front of the banks to say to them ‘this is what we are going to do to get your money back’ so that they didn’t take us over and we could retain some value for shareholders.

You saw in Tongaat they didn’t get agreement with the banks, and the banks have turned down that plan. We didn’t have that situation. So I think we are in a great position now – having weathered four major storms and still [having] increased operating profit 91% last year – to go to shareholders and say, well, do you want to invest in this business, or must we continue to sell more assets, or must we continue to give the money to the banks at 15% interest rates and rising?

We are fairly confident that we will continue with our shareholders who I think would want to invest largely in the business.

FIFI PETERS: You have brought your debt position down quite significantly over the past year, I believe. Your 2022 financial debt is sitting at around R1.3 billion or so. Is that correct?

STEPHEN VAN COLLER: That’s correct. Just over R1.2 billion now.

FIFI PETERS: So why not raise more? You are raising R500 million to R600 million, you’ve got the support of one of your investors who will be plugging in a R100 million or so. Why not raise more? You wipe out the debt and you are done, and you continue with the road ahead – or will the R600 million be enough?

STEPHEN VAN COLLER: The way the investors look at it, and the bankers, is what your cover on your debt is. At the moment, if you have a look at our Ebitda [earnings before interest, tax, depreciation and amortisation], we did about R500 million – so that’s about two-and-a-half times cover. Then we’ve sold some of the businesses, so we are slightly less, so maybe we are at two-and-three-quarter times Ebitda cover.

The problem with that is we’re seen as a leveraged company, and therefore the bankers charge us I think excessive interest rates at 15%.

With interest rates going up, that could be 16%, that could be 17%, and if you just run that on a spreadsheet, 15% compounding isn’t a very pretty thing to behold.

The real issue, to be quite frank, is that we must either invest in growing the business or we must do something else, and we can’t invest in it while we are paying 15% interest, because basically we are a 10% Ebitda margin business and that basically takes all our free cash flow. So [we] don’t generate enough cash to really invest in the future of the business.

That’s why it’s a shareholder decision. We haven’t missed an interest payment, even through all these crises. If we have to continue paying it, it is what it is. But then we are not going to grow the business. And so that’s why it needs to be a shareholder decision.

FIFI PETERS: I was speaking to an analyst earlier, a respected market commentator who looks at your company and the sector, Keith McLachlan.

I asked him: “What it will take for you to invest in a company like EOH again?” He said the day it moves from the position of being a turnaround story to a growth story.

Now you’ve just told us that you believe that you’ve got an investment case to present to your shareholders tomorrow, and that’s why the company is confident embarking on this route to raise money from its shareholders. You believe you do have a strong investment case.

So what is that, Stephen, and how is it possibly going to be impacted by what is happening in the macroeconomic environment? We are hearing talks of recession happening in many parts of the world while our economy has been a lot more resilient. Many are saying that it’s just a matter of time before things catch up. You’ve got the element of load shedding that’s also hanging over the economy. What’s your investment case, and how is the macroeconomic environment impacting that case?

STEPHEN VAN COLLER: That’s also a great question. The issue with the macro environment is it affects every single business in South Africa. So no one is unique [in that] they don’t get affected by load shedding, by economic crises, etc.

The question you have to ask yourself is relative: Company A to company B, which one would you rather be in?

There are two things, and I think this is why Lebashe [Investment Group], which owns 14% of us, have already agreed to follow their rights, about R54 million, and they’ve asked to put another R100 million in to up their strategic stake closer to 22/23%. The reason why I think they [did that] you need to ask them – but there are two things.

One is that the IT industry normally grows at GDP-plus-2%, so it’s very correlated to the GDP but always slightly ahead of GDP.

But what we saw through these crises is that we didn’t get the negative GDP. So when South Africa went minus 10%, the ICT industry went flat. So we actually are a very defensive industry.

It is an interesting industry to invest in in difficult times, because it’s a bit like bread and butter. People need IT to run their companies post-Covid. Everyone with a shop anywhere, working anywhere, needs proper IT systems with proper cybersecurity, with proper storage, with proper connectivity. And so people tend to make sure that they don’t stop buying their bread and milk.

The second thing is that we seem to have hit bottom – [and] if you have a look at our half-to-2021 versus half-to-2022 [period], we grew 17%.

So we are seeing that turnaround as we get back into our normal market share within South Africa. I think that’s what people are seeing. That’s certainly what I think our strategic partners saw.

And from our roadshow the existing shareholders [seemed] pretty happy with what we’ve done. In my whole life it’s probably one of the best roadshows I’ve been on, in terms of shareholders thanking us and accepting that we’ve now got to the end and we need to make a decision.

FIFI PETERS: All right. Stephen, we’ll leave it there. Best of lack for tomorrow. We’ll obviously follow the statement that you’ll have to issue after the AGM is done really closely, and catch up then.

Stephen van Coller is the CEO of EOH.