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JOHANNESBURG — Local IT services company EOH continues to produce strong results, year after year. Just last month, the company reported a 16% rise in profit for the year ended July 31 while its headline earnings per share rose by 16% to R8.32. Meanwhile, its revenue for the period grew 21% to R15.5bn and its operating profit rose by 29% to R1.8bn. Yet the company’s share price is down over 40% in the last 12 months and it continues falling as it hovers below the R100 mark. The company has previously reported that 90% of its revenues come from South Africa. But it could be concerns around EOH’s government business that may be worrying investors most, as Alec Hogg and David Shapiro discuss in their latest Old Firm podcast. Allegations of corruption have previously swirled around EOH, according to reports from the likes of amaBhungane. It’s a curious case of a company performing financially well — yet its share price continues to come under downward pressure. – Gareth van Zyl
*This snippet appeared in the latest Old Firm podcast. You can read the full transcript here by subscribing to our premium section. In the interview, Alec Hogg asked David Shapiro about what his thoughts are about EOH’s recent poor performance on the JSE, and this is what Shapiro had to say…
EOH is something else. EOH over the last decade or so has just produced incredible results. Every year growing. Remember Asher? Do you know when I remember Asher Bohbot? When you were at 702 and he left in the 90s, I can’t remember when it was. I remember him coming in, in a very nervous way sitting down there and perspiring. You were interviewing him and he was a newcomer, it was a small company, and from that day to where he is today or where EOH is today – is an incredible growth story. He built a superb company – always growing and a lot through acquisitions but over the last year or so, there’s been question marks about governance issues. About employing people to get government contracts and a lot of accusations about how they got that business.
Asher has resigned. The results are still pretty good. I read Irnest Kaplan quite a lot and Ernie knows that area. He always comes out fairly positive about them but the share price has just gone backwards. It must be down by 25% – 30% this year, against fairly good results. I can’t identify why that share is as weak as it is without any real news around it. In fact, I’m just looking now. In over 12 months it’s a share that’s down about 45%, this year alone 43%, and the results show a completely different path. Results are very strong and good. The new management there stand behind those results and say, ‘things are good.’ But the market, (for some reason) just keep selling them down and down. We can’t get to the bottom of the story there. It’s one that we need to pursue.
Somebody knows something that we don’t know, and certainly we’re getting lots of whispers. There might just be a whispering campaign. That’s a stock that was R171 a share a year ago – it’s now R93 so, that is a significant decline. But there are a lot of question marks over any company, given what happened with KPMG and McKinsey, any company that’s doing a lot of public sector business, and that’s where EOH makes its money. It’s deep in the public sector and the way that you used to do business in the public sector it appears, certainly from McKinsey and SAP, Software AG, and KPMG on their side is that if you just cross the right palms with silver, and usually those palms where from the Gupta family, and you actually were in. That does appear to be something that’s uncovering now.
That’s exactly right, you’ve put it very articulately and I think people are beginning to question those businesses with strong government connections, and how is the business? I think there’s a lesson to people who might read this or who might be listening to your podcast and I’ve got a very favourable response, I must say. But Alec, when a company, and this is the Madoff syndrome, let’s call it that. When Madoff was making profits, regular profits of 10% every year at a time where the market was going down. That begins to create suspicion. In other words, where they start to outperform and they’re doing things that no one else could do you start to ask questions. I think this is one thing that bothered me long before the share price of EOH began to fall. I kept saying, ‘how can they produce these stunning results?’ Where every other business in the country was coming nowhere, well certainly in that area of the market as well, in IT services? Then it starts to, you start to worry. Maybe these are not real and it’s always a worry, where you just get these consistently, good, solid results. Nothing ever goes wrong. In EOH every division was outperforming and that also raises alarm bells. I know for young students or young people who look at the market they might think I’m silly but it’s a warning sign.