EOH the gravity defying tech stock whose FD can’t see any downside. Heard that line before?
Sometimes it's easy to feel like a Killjoy. I recall being castigated by fellow dinner guests at a Dimension Data yearend celebration in 1999 after suggesting the company couldn't keep posting 30% a year revenue growth. That ended in tears. EOH financial director John King had a more diplomatic response today to similar scepticism. But the impression was the same. Executives sometimes really believe they have found the secret that everyone else has missed. It could be because of their confidence in a unique business model or that they're a market share gobbler in a rapidly developing sector. Experience has taught me to become nervous when share prices take on vertical qualities. Because they can all too often fall just as quickly. For the moment, though, Mr Market absolutely loves EOH. A share price that's trebled in the last two and a half years and is up 87% in the past 12 months reflects our fictional friend at his manic best. That's not the only thing that bothers me though. This year's operating profit margin was 9.7%. Last year's was also precisely 9.7%. That after a 40% jump in revenues to R5bn. An amazing co-incidence? For the moment, analysts love this entrepreneurial business. Its shares, however, are priced for perfection. One mis-step could see the virtuous cycle reverse. At a historic PE of 19.7 times had I been fortunate enough to own the stock, I'd be banking some profit. – AH
ALEC HOGG: EOH reported a 40% rise in revenue to just over R5bn. That was for the year-to-end July, driven by a combination of organic growth and recent acquisitions. John King is the Group Financial Director. He joins us here in the studio. You remind me, even though you might not know him, of a man call Malcolm Rutherford. Malcolm was the Group FD for Dimension Data and when they were in their heyday, putting these kinds of numbers on the table, he couldn't see the end of it. Your shareholders and your company can't see the end of it either. Your share price – up a little today, but up 87% in the last year, three times in the last 2½ years and 40% growth in revenues. Are you going to defy gravity in a way that Dimension Data couldn't?
JOHN KING: We've been in existence for 15 years now, and our compounded annual growth has been 45%. Essentially, we've been doubling in size almost every two years. To put it into perspective, we are a R5bn company in terms of revenue. The addressable market – IT alone – is probably between R80bn and R100bn. The service market is probably another R80bn to R100bn, so we're R5bn out of a couple of R100bn market – a long way to go, and we're very optimistic.
ALEC HOGG: Malcolm said the same things about Dimension Data. They had the whole world and they started doing acquisitions all over the place. Perhaps that was their downfall. Your acquisitions though are the smart ones – bolt-on's.
JOHN KING: Our strategy is organic growth plus acquisitions. We don't, at the beginning, decide we're going to do three or four acquisitions or ten acquisitions or we're going to get a certain percentage of growth out of acquisitions. What we have is a puzzle – as I put it – with various domains in that particular puzzle. We have lots of white spaces. We look for the right businesses in those white spaces. When they come along we will get those businesses to join EOH. We talk about businesses joining EOH as opposed to acquiring businesses, and fundamentally, that's the difference. People join EOH. We don't acquire them. We don't buy people. So when we look for good businesses we don't look for businesses we can turn around, when they join EOH we look to unlock their potential. Businesses that have not had the opportunity to deal with large enterprises before – with EOH backing – are now able to interact with these businesses. They do fantastically well.
ALEC HOGG: Give me an example, John.
JOHN KING: Well, if you look in the IBM space – and I won't mention the company – but in this space there was a small company that we acquired about four years ago. At the time that we were buying it, or looking to acquire it, two of the big banks came to us and said 'if this business joins you we will place two orders; one for R40m and one for R30m at the time. On the signing of that particular deal, that has happened. Another one is down in the Western Cape – more recently in the Microsoft space, where they've basically doubled the size of their business in a year. They've done nothing different other than work with us and our clients. We have a 'partner for life' philosophy so we don't want to go in to a client and do a job and do a project. We go in there and stay with those clients. We grow with those clients. In the IT space, as you would know, what happens is that you have to become a specialist in different fields. They get to a stage where they have to have 40 specialists to just operate their businesses. By coming into EOH they are obviously able to do this. We can use the FTE – the fulltime equivalent so we can have eight persons servicing one, two or three clients.
ALEC HOGG: And they can also tip you on the businesses that are doing well and perhaps also come into the company as.
JOHN KING: Absolutely.
ALEC HOGG: But you have appointed a new Chairman – Sandile Zungu. He's extremely well-connected with the Zuma regime. He succeeded Mathews Phosa – not so extremely well-connected with the Zuma regime. As a sceptic I wonder: is he the right man for the job or were there other reasons?
JOHN KING: I think if you look at Sandile…a fantastic man. A lot of energy, a people person and an entrepreneur – very much the same philosophy as EOH. He's not a person that knows a huge amount about IT, but I don't think you have to know a huge amount about IT to be a good Chairman. He's obviously…from an ethics point of view and from a governance point of view, right for us and we're very excited about him joining EOH. We think he's the right man.
ALEC HOGG: Will he open doors for you in government?
JOHN KING: We already do about 25% of our businesses in government. I think from an EOH point of view, what we look at is delivery. So, will he open doors or not? We're not 100% sure. We have a wide range of businesses that operate in government already so we are fairly well-placed there.
ALEC HOGG: I ask this because when I spoke with your colleague, Asher Bohbot, probably a year ago, he said your focus was to get more involved in the public sector. That was a big opportunity for you, which was strange, because everybody else was running away from the public sector for other reasons. This appointment isn't going to hurt that process?
JOHN KING: I don't think so at all. I think people see him more as a businessman than as a politician. I think Mathews was probably seen more as a politician than as a businessman. I think that's the difference.
ALEC HOGG: So when your shareholders look at the rating of the stock, at a price to earnings ratio of almost 20, at a dividend yield of 1½%, they must be asking you 'are you going to be able to keep 40% revenue growth, 35% earnings growth, growing for much longer?'
JOHN KING: Yes. I've been asked this question year in and year out for the last 6/7 years. Many of them tell us we're getting into a state where we're too big, where our margins will be decreased etc. etc. Half our growth is organic. Half is through acquisitions. All the businesses within EOH are contributing. We don't have any loss-making businesses in EOH. There's a huge opportunity out there. There's huge opportunities in the outsourcing space. Businesses are outsourcing their IT, and we want to get closer to our clients. So we're looking at consultancies that specialise in certain industries, so that they can be the interpreters from a technology point of view. And technology is no longer something that is 'nice to have'. It's an imperative. So there may not be huge projects but there's always the upgrades. There's the whole digital and the media stuff and it's going to be there for a long time. The industry is growing at probably twice the rate of the economy, so just that alone obviously contributes.