EOH: The Cracks Appearing

It may sound like I am picking on EOH Holdings (EOH), but I am not. My job is to look critically at companies and, where appropriate, disagree with the consensus view. Even if this is uncomfortable and hurts peoples feelings, it is important that I do it. EOH is one of those things and I originally wrote about my view of its greatest risk over here (very much worth reading as context to this article).

EOH’s share price is down over two years and -35% year-to-date. It is fast turning from a little sell-off into a disaster, coincidently at the same time that its old CEO has resigned.

I am going to ignore all the Gupta allegations because those don’t actually matter here. What matters here is that a business that is in the business of buying businesses with its own highly-rated script, is now running the risk of not having that highly-rated script anymore.

That is a problem.

It is such a problem that the new CEO of the Group released the below letter to shareholders. I have copied it below and then [in bold parethesis] inserted my own interpretation as to what is actually being said:

To our Stakeholders
Johannesburg, 27 July 2017 – EOH remains strong, with a great leadership team and strong fundamentals [this means nothing, as I am yet to ever meet a CEO that does not say this about his business]. The organisation remains resolute and focused in its purpose of providing value to its clients through the provision of technology solutions, knowledge and skills [so EOH has not changed the organic part of its business model, while important, this is also irrelevant. Why would an ICT service group suddenly change its business model, and, if it did not, have to tell us that it did not? I.e. This is fluff.]. We have an organisation of highly skilled people [every service company says that], with a strong value system, and we are committed to being an ethical, relevant force for good in all the societies that we serve [every organisation says that, even the corrupt ones].
In line with our strategy, we continue to drive our organic [the jury is out on this one, but if this was negative, would you really tell us in a PR announcement?] and acquisitive growth [this one is going to get immensely tough to pull off if EOH’s share price continues sliding]. We have recently had major client successes with significant contract wins in a number of the industry sectors, further bolstering our order book [while this is positive, it talks nothing about margins of the book, fundamentals or even net wins, including losses and contracts naturally concluding that are not being renewed. I.e. This is very well-phrased fluff.]. On the acquisitions front, we will be making announcements shortly, as the transactions reach final close [so, in other words, your business is still about buying businesses, and you continue buying businesses… I don’t know about this one. It sounds more like a promise to me than any kind of fact. I.e. Nothing has happened, but we promise that something will happen.]. Our expansion into emerging markets has continued, and provides the ideal platform and channel to take our offerings into these geographies. EOH’s skills, IP and solutions are particularly relevant to these geographies, providing further growth opportunities into the future. [This is their strategy and it has not changed, which is pretty much repeating what was said earlier about their business model not changing and their organic and acquisitive growth not changing… I.e. This is a redundant statement.]
The recent media reports about EOH have been a cause for great concern for us all. [Yes?] With the assistance of an independent legal firm, we have conducted a review and are satisfied that the insinuations in these reports are false and untrue, and we have repudiated them in the strongest terms. [A natural response, good to hear that the lawyers you have paid for to tell you that you are clean, now say that you are clean.] We are confident that our overall governance, risk and compliance (GRC) framework and processes are robust and strong. [As a JSE-listed company, I do hope so.] As an additional measure we have nonetheless brought forward the periodic review of our GRC framework, under the leadership of the chairperson of the Audit Committee. [Once again, as a JSE-listed company, I do hope so.]
I am personally committed to ensuring sound corporate governance, and that we at EOH continue to conduct our business based on the highest ethical standards, whilst creating value for all our stakeholders. [While a good, confident ending, this is one of the jobs of the CEO of a listed business. So, it is good to hear that EOH’s CEO plans to do his job.]
Yours sincerely,
Zunaid Mayet
Group CEO

END.

There was a reason this was not released on the JSE SENS: it is PR, not IR.

Interestingly, though, it did have the desired reaction in the market. People believe what they want to believe.

The stock was done a lot, and it bounced on the release of this PR.

The point I want to make here is threefold:

  1. EOH is in real trouble, and it is not because of Gupta-related news. No, EOH is in trouble because their share price has de-rated dramatically, exposing their acquisitive growth to downside and potentially bringing historic overhangs to market in their share price.
  2. While the PR announcement by EOH may have temporarily shored up the share price of the Group, it was mostly just full of feel-good fluff and stating the obvious.
  3. Because of (1) and (2), I would not be surprised if EOH’s share price continues sliding, and this might ultimately become a self-fulfilling prophecy: share down a lot, so business performs poorly, so share price falls further, so business performs worse, etc…

Like I said at the start, I am not picking on EOH. Neither do I hope EOH fails. I do, though, believe that I have a responsibility to have my own thoughts and, where appropriate, share them with you. EOH is one of these. Ignore the fluff, and watch this space closely.

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