Top South African tech company in serious trouble

EOH, soon to be renamed iOCO, has reported a concerning rise in interest-bearing debt, which caused it to breach one of its debt covenants.

EOH released its results for the year that ended 31 July 2024, and the company pulled out all the stops to sell its turnaround story.

It told investors it had delivered a significantly improved financial position for the year and was on a path to value creation to enhance the group’s market position.

EOH added that it had improved its capital structure, resolved many legacy issues, streamlined its corporate office, and made progress in its growth strategy.

“These achievements mark key milestones in EOH’s journey towards financial stability,” the company said in a press statement.

EOH interim CEO Marius de le Rey said asset sales have assisted in a marked debt reduction and that the company now focuses on operational efficiencies and value extraction.

He said this would improve investor confidence, give them a strong competitive position in the market, and set the stage for future growth and innovation.

EOH CFO Ashona Kooblall punted the success of a stringent expense management programme and rationalising inefficient cost structures.

“We have reduced complexity, optimised tax structures, and established a lean, consolidated business model,” she said.

She added that having a determined value creation mindset driving growth and profitability, the outlook for the next year is promising.

The market loved what EOH, De le Rey, and Kooblall were selling, and the share price jumped by 8% on the day the results were released.

However, people who have been following EOH over the past seven years know that this is nothing new.

Since 2019, EOH punted its extensive turnaround strategy. There was even an EOH 2.0 launch to signal its rebirth and growth. The growth never came.

The latest iteration of EOH’s turnaround strategy involves changing its name to “iOCO Limited”, aligning with its strategic objectives and branding initiatives.

EOH revenue and profit

To see what is really happening at EOH, you have to delve into the finances and look at the fine print hidden in notes about the results.

The basic finances did not look good. Revenue was down 3.1% to R6.0 billion, and earnings before interest, taxes, depreciation, and amortisation (EBITDA) declined.

Particularly concerning is that the downward trend, which EOH promised to turn around, continued over the last financial year.

In 2018, EOH produced R16.3 billion in revenue and an operating profit of R977 million. This declined to R6.0 billion and R112 million six years later.

The company’s operating profit of R112 million was down 17% over the last year. This is bad news for any company.

On top of this, EOH has reported a worsening net loss. The company reported a net loss of R66 million in 2024, 14% worse than last year.

The chart below shows EOH’s revenue decline over the last six years and its net loss over the last three years.

EOH debt problems

The most concerning part of EOH’s latest financial results is its deteriorating debt position, which caused it to breach one of its debt covenants.

This is particularly worrisome as the company has promised investors that its debt worries were something of the past.

EOH sold many of its most valuable companies and concluded a successful rights issue to address its debt burden.

When it asked shareholders to cough up money as part of its capital raise, it said this would bring debt under control and set the company on a growth path.

Fast-forward a year and a half, and the company’s interest-bearing debt is once again a problem. It increased from R840 million to R960 million over the last year.

What should really concern investors is that EOH has breached one of its debt covenants with Standard Bank.

The debt covenant states that EOH’s debt should not exceed 2.75 times its EBITDA. It breached this covenant by having debt that was 3.28 times greater than its EBITDA.

Standard Bank agreed to waive this breach in the debt covenant, which prevented EOH from defaulting on its debt.

Another one of its debt covenants restricts EOH from having an interest expense on debt that is greater than 2 times its EBIT (interest coverage ratio).

The group’s latest financial numbers stated that its EBIT is 2.11 times greater than its interest expense.

However, the group showed an EBIT of R112 million, which is only 1.4 times greater than the interest expense related to these loans of R82 million.

The conflicting numbers are curious, and it is unclear how the EOH group defined this covenant.

EOH has pledged all of its wholly owned South African subsidiaries, which contribute more than 85% of its EBITDA, as security for the covenant-related loans.

This means that if Standard Bank did not waive the breach in EOH debt covenants, Standard Bank could lay claim to nearly the whole business.

It includes all shares, loan claims, cash, bank accounts, investments, claims, disposal proceeds, and other amounts owed by EOH’s most valuable subsidiaries.

It is clear that EOH’s turnaround strategy has not worked. After disposing of its most valuable assets to pay off debt, the company again finds itself in a major debt crisis.