EOH - Africa’s Largest Technology Service Provider

EOH operates across three pillars, namely, iOCO, NEXTEC and IP.

iOCO remains the core business for the Group contributing 59% (FY2019: 52%) of total Group revenue and 67% of total core Normalised EBITDA. iOCO's end-to-end ICT capability provides a robust backbone on which to grow its market share. The business is currently being managed around three of its core offerings, namely, services, technology and digital. iOCO is strategically positioned to grow organically as well as capitalise on geographic opportunities. iOCO is also set to benefit from the rapid digitisation of business brought on as a result of COVID-19.

NEXTEC contributed 30% (FY2019: 35%) of total Group revenue to the Group and 7% of total core normalised EBITDA. The NEXTEC cluster continues to reduce in size as its non-core businesses are wound down or sold while the remaining business lines are being consolidated to maximise efficiencies. The remaining business has been run in two broad groupings, namely, business process outsourcing and intelligent infrastructure. Management has worked hard to ensure that NEXTEC is self-sufficient on a standalone basis, de-risked from engineering, procurement and construction work and that it is no longer a cash drain on the Group (excluding non‑continuing businesses).

IP comprises three remaining assets, namely: Syntell, Sybrin and Information Systems. All three businesses are earmarked for disposal as part of the deleveraging strategy and together with a portion of CCS and Dataworld, are included in the reported numbers and contributed 11% (FY2019: 13%) of total Group revenue and 26% of total core Normalised EBITDA.

EOH is beginning to realise the benefits of its turnaround strategy, notwithstanding the current unprecedented market conditions. The new management team's bold and decisive actions have largely restored confidence across all of the Group's stakeholders. This confidence is reinforced by the performance trajectory on almost all metrics, which have meaningfully improved on both an annual basis (FY2019 to FY2020) and on a six-monthly basis (H1 2020 to H2 2020) and have continued to improve into the first quarter of the 2021 financial year.

A significant focus has been placed on quality of earnings as opposed to revenue at any cost. This is evidenced by the improvement in margins as well as the closing out of legacy issues, which have historically caused a drag both on earnings and cash generation.

Revenue

While total revenue decreased 24% to R11 277 million from R14 949 million in the prior year and continuing revenue was down 19% year on year, the core iOCO business remained relatively resilient with an overall reduction of 13% in gross revenue (before intersegment eliminations). The decrease was largely due to businesses disposed of or closed during the current or prior year. Furthermore, the national lockdown, together with deals not repeated in FY2020 had a negative impact on the hardware business, which saw a decrease in revenue of 33%. The other businesses remained resilient due to a broad client and product base that had little reliance on a single sector or product group.

NEXTEC revenue reduced by 36% (before intersegment eliminations) as non-core and EPC type businesses were exited. The decrease was largely due to businesses disposed of or closed during the current or prior year.

The IP businesses, two of which were the most impacted by COVID-19 through their B2B2C exposure, saw revenue reduce by 36% (before intersegment eliminations) on the previously reported numbers, but by 22% when the impact of the sold IP businesses, being CCS and Dataworld, are eliminated. The B2B2C businesses have seen a faster than expected rebound in business after going into lockdown level 1.

Gross margin

Overall year-on-year gross profit margin increased by 2.3% points from 19.6% to 21.9%. iOCO saw an improvement on gross profit margin of 3.7% points to 24.3%. The improvement in margin was as a result of exiting international businesses in the prior year which were underperforming and significant efficiency measures that bore fruit during the year. A lower contribution from hardware sales also supported margin improvement.

NEXTEC also experienced a strong improvement in gross profit margin increasing year on year from 12.0% to 14.9% as a result of having exited underperforming businesses in the prior year and significant efficiency gains being realised.

IP margins remained stable year on year in the region of 39.7%.

Costs

Total operating costs (including continuing and discontinued) decreased 45% from R6 214 million to R3 403 million. During the six months to 31 July 2020, a decline in costs of 51% from R2 284 million to R1 119 million was achieved. The significant decline in operating expenditure is a result of a reduction in once-off costs, asset sales or closures and implemented efficiency measures.

Once-off cost reductions were as a result of:

• the reduction in impairment losses from R2 259 million in the prior year to R522 million for FY2020; and
• other once-off costs declining from R922 million in the prior year to R353 million in FY2020.

After the elimination of once-off costs, sold businesses operating expenditure decreased 5% from R2 476 million to R2 358 million.

Core to the Group strategy has been the right sizing of costs, structures and systems. COVID-19 placed further focus on ensuring costs remain as flexible as possible with the reduction in systemic fixed costs (some of which may take longer to right size) being a key focus area.

Continued progress has been made on the property optimisation programme with lease exits to date realising R74 million per annum of rental savings. Full optimisation of the property portfolio is expected in FY2023 when all lease renewals align and/or come to an end. A further R10 million of savings is expected in FY2021 as further leases are exited.

The focus on simplifying structures and legal entities has continued with legal entities reducing by 99. The Group aims to further reduce legal entities over the next two years in order to reach its target number of 34 companies by calendar year 2023.

Improved systems, significant changes to financial discipline and controls are also set to yield future cost benefits.

Headcount has further reduced from 10 279 to 7 333 largely due to contractors not renewed and businesses being sold.

Legacy contracts (non-core business lines)

At the date of publishing this report, five of the eight problematic public sector contracts have been settled, with one currently in arbitration, one in final negotiations and the final contract concluding at the end of April 2021.

In the current financial year, a total loss of R323 million was recorded as a result of these legacy contracts (H1 2020: R188 million and FY2019: R279 million). These contracts do not qualify as discontinued for reporting purposes as they relate to specific contracts and not a division or definable area of business.

Settlement has also been reached with the Special Investigations Unit post-year end in respect of disclosures reported in May 2019 for two of the three identified contracts where overbilling of licences occurred. EOH will repay R42 million over a period of 36 months as reimbursement for overcharging the Department of Defence and is in the process of finalising a similar arrangement with regards to the third and final contract. These costs have been fully provided for in the FY2019 and FY2020 accounts.

A number of EPC contract businesses within the NEXTEC stable are in the process of being wound down and contributed losses of a total value of R172 million (H1 2020: R83 million and FY2019: R247 million).

EBITDA

Total core Normalised EBITDA for the year is R827 million (FY2019: R482 million). EBITDA before normalisation adjustments was R72 million for the full year with R285 million EBITDA generated in H2 versus an EBITDA loss of R214 million in H1 2020. R422 million of normalised EBITDA was generated in H2 2020 versus R405 million in H1 2020.

Headline loss

Total headline loss per share from continuing and discontinuing was 495 cents (FY2019: 1 751 cents). This is a 72% improvement year on year. H1 2020 total headline loss per share was 395 cents per share versus 100 cents per share for H2 2020, being a 75% improvement.

Working capital management

Working capital management continued to receive a high degree of prioritisation, as part of overall liquidity management, particularly as the COVID-19 impact was felt. Investment in net working capital improved from R512 million in the prior year to R176 million in the current year.

Cash and cash generation

FY2020 generated positive operating cash flows of R706 million with 96% of this generated in H2 2020. H1 2020 contained significant once-off items of R229 million, largely related to legacy OEM settlement issues while H2 2020 only contained R44 million of once-off items.

Improved tax planning also helped reduce the tax paid from R313 million in the prior year to R211 million in the current year.

The Group has implemented a cash pooling arrangement which has significantly improved the Group's ability to manage its cash and liquidity. Closing cash balances as at year end were R946 million while undrawn facilities were R245 million.

Management has successfully led the Group through the uncertainty of COVID-19, as detailed later in this report, and appropriately positioned the business for future growth while simultaneously paying down large tranches of the inherited debt.

Deleveraging has primarily been achieved through disposals. The Group remains committed to its deleveraging strategy having paid R291 million in capital in the current year and a further R409 million post-year end. This will result in an expected outstanding balance of c.R2 billion – significantly reduced from the R4 billion that the new management team inherited at the start of its tenure in FY2018.

EOH gave testimony to the Zondo Commission in November 2020 and provided evidence on irregular money flows at EOH, which were uncovered in the ENSafrica forensic investigation which was commissioned by the EOH Board in 2019. EOH provided the Commission with detailed information related to the suspicious and unethical business practices ENSafrica uncovered dating back to 2014, as well as the parties involved. The Group is happy to finally be able to close this chapter as it has now handed over all information to the relevant law enforcement agencies and can now focus on providing best-in-class technology services and solutions to its clients in both the public and private sectors.

The period under review coincided with the global outbreak of COVID-19 and the President of the Republic of South Africa announced a national state of disaster on 23 March 2020 and implemented the first of a series of lockdowns. iOCO continued to operate during the period as an essential service with the team doubling up on efforts to ensure our clients benefited from an uninterrupted supply of ICT services. The declaration of a state of disaster further galvanised management to immediately embark on a programme to preserve the Group’s liquidity through a number of solutions including:

• a three-month salary reduction for all staff and directors except those earning less than R250 000 per annum;
• the reduction and rental holidays from landlords;
• a freeze on salary increases; and
• a heightened focus on the already established priority of reducing and managing debtors exposures.

In addition, the Group deployed a COVID-19 management team to monitor and manage the pandemic within the EOH ecosystem by:

• supporting a work from home approach with a focus on preserving staff moral and engagement through innovative solutions;
• preservation of jobs as far as possible; and
• supporting government initiatives like the Solidarity Fund and the BLSA website on a pro bono basis and the provision of over 70 innovative client solutions.

EOH is now focused on growing the iOCO business within South Africa and select African countries. The business in Egypt will be expanded to be used as a springboard into the Middle East and to complement the expansion of certain solutions into Europe.

Furthermore, NEXTEC has been reorganised into two main pillars and will continue its turnaround trajectory and remain self-sustaining.

The IP businesses remain for sale as the path to a permanent capital structure. They have their own boards and own bank accounts but are assisted by the Group for sales and marketing as required. It is crucial that fair value is achieved on the disposal of these businesses and that they are not sold at sub-optimal prices in an environment where corporate action is being delayed and impacted by COVID-19.