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EOH may be the largest technology service provider business in Africa, but it has seen its fair share of bad publicity and a massive drop in its share price. CEO Stephen Van Coller joined the BizNews Power Hour to share his fixing strategies and what the future holds for shareholders.
Stephen Van Coller on EOH:
If you remember, right in the beginning, we talked about having to keep the iOCO ecosystem together because that was 65% of the market cap. That business operates as an ecosystem because it’s the only end0to-end system integrator in South Africa. 84% of its revenue comes from services, which is own IP. You don’t want to just sell someone one product these days. They want them connected together.
So we had to make some decisions. These IP assets ran largely on their own. They were ring fenced, so they were easy to sell. iOCO was a little bit more difficult because it was a number of businesses that had been pulled together. When we made that decision, we said let’s sell the easy ones where we will get the higher multiples – the most bang for our buck. Then, you have a business like iOCO that’s very scalable – very aligned to growth – and we’ve seen that accelerate through Covid.
I think we’ve made the right bet here, judging by the results and the margins we’re now getting out of iOCO and that will just write itself over time. When you sell these businesses, you get a multiple of the cash flow or earnings of those businesses. You can take a few years forward and you can actually pay down the debt today – and this is really what the attractiveness is.
Also, you have to be careful if you hold on to a software or platform businesses too long without investing in them, someone can catch you up. You have to continually evolve them. We just didn’t have enough capital to do that. So it was always about getting the right home for these businesses that someone can invest in them. You save the jobs, but you also save the business because they can continue to grow.
On the drop in the share price:
If you have a look over the last week, the last month or the last six months, the share price is up. Our share is quite thinly traded so it can bounce up and down. It went crashing down, went straight up again in a V shape, and then someone sold a big chunk during the auction, which put it down. Otherwise it would have been, only about 1%-1.5%. But that’s after quite a big run from around about 780c at the beginning of last week. It’s just what the share is. It bounces up and down.
There are issues we still have to sort out the debt and the tax, obviously, still sit there and we have to finalise our last few legacy issues. Until those are done, it’s quite difficult to get a read. But the most important thing, for me, was two things. One is we’ve reduced the size of the business, but the margins have gone up. We’ve made the first operating profit in just over two years. The reason why it didn’t turn into headline earnings positive was tax and interest. But most importantly, you can now start seeing what the normalised business looks like. because the difference between normalised EBITDA and reported EBITDA was only R33m.
This time last year, there was over R500m of normalisation adjustments. What I take a lot of comfort from, is two years ago when we started this programme, just after the bombshell dropped, we estimated if we did everything that we planned to do, we’ll end up with annualised EBITDA of around R800m. That didn’t take into account CCS and Syntell sales. If you add those back, we’re actually slightly better off than we predicted two years ago. That gives me comfort that the underlying business was as strong as I thought it was at the time.
On getting the Microsoft licences back:
The closure with SIU on the matter was pretty important. We will try and engage them over the coming years. But the reality is the actual selling of licenses is a small portion. If you think about it, we use Microsoft every day. They allow me to use their software, I pay them licenses. We’ve still got a lot of the engineers – the qualified engineers – that we work with, customers and deliver Microsoft products. You may have seen at the end of the year, ironically, we were named the AWS Microsoft Workloads partner of the year.
A lot of that skill still stays within our business and we can still use it. What it has forced us to do is obviously upscale our AWS (Amazon Web Services) business – which is really doing well – and our Google Cloud business. Both of those have grown over 15% over the last six months. What’s nice about it is, obviously, not great reputation wise, but it has forced us to diversify – and we’re seeing some of those results come through.
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