• After three years of rightsizing and focussing the business, EOH has returned to profitability with an EBITDA from recurring operations of R471m in FY21. The group is significantly leaner following the exit of many businesses – its revenue of R6.9bn from recurring operations approximates what the group achieved in FY14. The net debt has reduced from R4bn to R1.9bn. The last of its planned asset sales should conclude in FY22E helping to further reduce its net debt to circa R800m and creating an operational structure off which to grow.
  • Tough decisions have been taken along the way as debt reduction has dictated the sale of promising profitable businesses. This together with the finalisation of loss-making legacy contracts and the implementation of appropriate risk and financial management frameworks, has distracted management significantly over the past three years. A re-focus of this time should yield considerable benefits going forward.
  • 84% of revenue is earned from services with the balance coming from traditional hardware and software sales. iOCO is the dominant operation and contributes 72% to recurring revenue and 100% of recurring EBITDA, distorted by the fact that NEXTEC has undergone the bulk of the restructuring. International operations have also been rationalised and are currently 8% of revenue – the UK and Egypt operations provide a springboard into Europe and the Middle East.
  • COVID-19 has meaningfully impacted operations, with reduced corporate IT spend, hardware supply constraints, and a setback in economic growth. Digitisation of data and processes, cloud computing, data analytics and app development represent strong growth opportunities as COVID-19 has exposed corporate IT shortcomings in a digital operating environment.
  • Debt has been restructured with a bridge facility of R1.5bn requiring settlement by October 2022. We estimate that asset realisations and operational cash flow will be insufficient to achieve this and further support from banks is needed and/or access to the capital markets is required. Excessive interest costs are hampering growth opportunities and further business sales will negatively impact the scale of the group. Therefore, accessing the capital markets (circa R400m) seems preferable with the possibility of a B-BBEE transaction playing a part.
  • We anticipate a sharp recovery in profitability in FY22E and FY23E as EBITDA margins expand, the tax charge normalises, and the interest expense declines. We forecast HEPS of 67c and 142c in FY22E and FY23E. We value the stock on a DFCF basis and achieve a fair value range of R8.70-R11.42/share. We envisage the company approaching the capital markets which could impact the stocks rerating until clarity is obtained. Missing debt redemption targets is a key risk to our estimates.