EOH Commentary

The EOH Board and management team are pleased to report that, despite the ongoing challenging operating environment, this six-month period marks the successful completion of EOH's targeted turnaround strategy, with the Group reporting its first positive earnings per share in three years to 13 cents – a 116% improvement on the prior period (H1 2021: 83 cents loss per share) – and headline earnings per share of 41 cents (H1 2021: 36 cents loss per share).

The continued acceleration of digitisation across the business landscape has seen EOH entrenching its status as one of Africa's largest technology service providers by enabling its clients to rapidly pursue secure digital transformation and automation strategies as they adopt new hybrid operating models necessitating seamless connectivity between their virtual and physical environments.

The six-month period also sees the successful close out of the first phase of the EOH Board and management team's deleveraging strategy with the successful sale of a number of businesses previously identified for disposal in order to urgently pay down material tranches of the Group's onerous legacy debt. The IP assets are the last assets to be sold as part of this deleveraging process. The Sybrin sale was announced on 8 June 2021, with the proceeds from the disposal received on 31 March 2022 and the sale of the Information Services ("InfoSys) companies, announced on 11 March 2022, is expected to conclude in May 2022.

As part of this process EOH has also concluded its debt restructure with lenders whereby the Group has access to a R500 million three-year bullet facility; a R1.2 billion bridge facility repayable 1 April 2023 and overdraft facilities of R250 million (which were undrawn as at 12 April 2022).

As previously communicated, with the disposal strategy now complete and with the business optimally structured, from both an operational and commercial perspective, to offer its clients holistic technology solutions, EOH now requires the right capital structure for the business to pursue a growth-led strategy. To this end, management commenced engagements with shareholders and the investment community at the beginning of March 2022 in order to evaluate the various options available as the Group seeks to bed down a sustainable capital structure. Discussions to date have focused primarily on raising capital through a rights issue or having a strategic investor take a significant stake in the business. The long-term debt to equity target is 30:70 or less and one times EBITDA cover or less. Given the supportive investor engagements and insights received to date, the EOH Board and management team have every confidence that an optimal solution will be found and that this process will be concluded over the next few months.

iOCO continued to perform well with a significant improvement in gross profit margin to 29.0%, compared to 26.6% in the prior year, and stable adjusted EBITDA margins at 10.2% (2021: 10.1%).

As part of the Group strategy aimed at evolving the business model, iOCO has established Infrastructure Services ("IS) as an end-to-end service offering. The IS offering comprises the Managed Services and Connectivity businesses (previously included in iOCO Services) and the Compute platforms business (previously included in iOCO Technology). The establishment of IS has resulted in higher adjusted EBITDA margins for the combined business for the half-year to January 2022 of 6% (2021: 4%), reflecting the enhanced value of the platform business model.

The businesses remaining in the iOCO Technology cluster comprises enterprise applications (EA) and the software reseller business, which saw a reduction in adjusted EBITDA margins. The reduction in adjusted EBITDA margins to 9% (2021: 13%) was as a result of OEMs reducing margins to resellers of software and the EA business performing at sub-optimal levels. The performance of the EA business is being addressed; and given that margin pressure from OEMs to resellers is expected to be a long-term trend, the OEM strategy for software resellers is being refined.

iOCO Digital is at the heart of 4IR and delivered a solid performance, albeit with a reduction in revenue. Revenue reduced as a result of a close out of a non-recurring contract in Prague that was partially offset by new business. The business has focused strongly on cost management and productivity and as a result saw expansion in adjusted EBITDA margin to 10% (2021: 8%), as well as an upward trend in revenue growth off its new base.

The iOCO Platform business houses the knowledge outsource businesses and early platform businesses. Revenue reduced as a result of a close out of a low margin non-recurring contract. This has resulted in an improvement in adjusted EBITDA margin from 8% to 10%.

Digital Industries provides operational technology solutions to customers in the industrial, commercial and process control industry sectors and posted an adjusted EBITDA margin of 18% (2021: 19%). Digital Industries' margins decreased slightly as a result of investment in growth and opportunities to grow out the business into Africa and the Middle East.

The iOCO business is now a well-balanced business, with a focused strategy and an end-to-end offering to customers in the ICT space.

NEXTEC has focused on turning around the business over the last three years, improving the business model and developing a strategy for the business, which is now made up of two main pillars – people outsourcing solutions and infrastructure solutions. The focus has remained on achieving quality earnings through de-risking the profile of deals signed and focused offerings to customers. NEXTEC has made significant progress in this regard, achieving an improvement in gross profit margin to 28.9% from 22.9% in the prior year; and an adjusted EBITDA margin of 5% compared to negative returns in the prior year.

The NEXTEC People Outsourcing Solutions business delivered a strong performance resulting in an expansion in adjusted EBITDA margin to 9% from 7% in the prior period.

The NEXTEC Infrastructure Solutions business was impacted by contract delays and international supply challenges; however, this was partially offset by the outperformance of projects in the mining industry, related to demand for mesh communication networks and the positive momentum in the consulting businesses, which is a leading indicator for industrial development in the country. The Infrastructure Solutions business delivered a positive adjusted EBITDA for the first time in three years with an adjusted EBITDA margin of 1%.

The NEXTEC businesses that remain core to EOH continue to be self-sufficient from a liquidity perspective.

The IP segment forms part of discontinued operations and is in the final stages of being disposed. Gross profit margin remained in excess of 50% with an adjusted EBITDA margin of 21.2% (2021: 28.6%).

(Commentary based on total continuing and discontinued operations)

Total revenue decreased 20% to R3 511 million from R4 376 million in the prior year and was largely attributable to disposals as the Group continued to execute on its stated strategy of exiting non-performing and non-core businesses, as well as the close out of legacy contracts and low margin contracts. This accounted for over 74% of the decline.

While revenue has declined, the Group's focus on quality of earnings and sustainable business is evidenced in the total gross profit margin, which increased by 2.3% points from 27.6% to 29.9%. This is a direct result of managing productivity and efficiencies, the turnaround in NEXTEC related to loss-making contracts, as well as exiting businesses and contracts in the prior year that were underperforming.

Total operating expenses decreased by 22% from R1 132 million to R881 million in the current year. The decline in operating expenditure is a result of a reduction in once-off costs related to goodwill impairments, with the current period amount of R42 million (2021: R70 million), reduction in depreciation and amortisation to R115 million (2021: R155 million) largely related to the IP businesses being held for sale and cost-saving initiatives across the property portfolio and staff efficiencies.

Total adjusted EBITDA for the period was R339 million compared to R347 million in the prior year. The prior year included an additional R50 million of adjusted EBITDA from discontinued IP entities. The Group saw an improvement in adjusted EBITDA margins from 7.9% in the prior year to 9.7% in the current year.

The Group posted a positive operating profit of R167 million for the half year (2021: R76 million).

Despite the Group's over-indebted capital structure and high interest bill of R97 million (2021: R139 million), as a result of the focus on quality customer contracts and cost efficiencies, the Group posted a profit after tax for the period for the first time in three years of R22 million (2021: R140 million loss).

Total headline profit/(loss) per share from continuing and discontinuing operations improved from a loss of 36 cents per share to a profit of 41 cents per share, while earnings per share showed improvement from a loss of 83 cents per share to a profit of 13 cents a share.

Working capital and liquidity management remained a key focus of the business with net working capital of R299 million and cash at the end of the period of R625 million.

Debt at 31 January 2022 was at R2 034 million. Subsequent to the conclusion of the Sybrin disposal and other smaller disposals, the debt is currently at R1.7 billion, comprising a three-year bullet facility and the remaining R1.2 billion a bridge facility. Further proceeds largely from the InfoSys sale will reduce the bridge facility further and are expected to be in the region of R425 million.

Cash generated from operations after changes in working capital was R258 million (2021: R26 million). After paying interest and taxes, the Group was cash generative with R124 million of cash generated from operating activities (2021: R165 million cash utilised). The Group has continued to focus strongly on liquidity management, which has shown through in the cash generation.

EOH's full stack of technology offerings, diversified client base as well as its global footprint, ensure the Group is well positioned for growth as the local economy enters the post-COVID-19 recovery phase. Demand for IT services and products remains robust and EOH's product offering enables it to capture this demand, as well as increase its market share.

Confidence in our outlook is underpinned by our robust commercial strategy, which is geared towards driving customer solutions and attracting new customers. As the business' cashflow generation improves and we get closer to a sustainable capital structure, EOH can firmly focus on growth and continue to capitalise on the accelerating demand for digital transformation across our client base.

Approved on behalf of the Board of directors of EOH.

Stephen van Coller
Chief Executive Officer

13 April 2022