With an improved capital structure in place and free of the onerous interest charges that it has been paying out to lenders, EOH can now properly invest in its growth opportunities. Initially, the fast-growing areas of digital enablement as well as the scaling and development of own IP technologies will be prioritised. Organic investment into geographic expansion of our existing footprint in Africa, Europe and the Middle East, has already begun.

In H1-2023 EOH invested R48 million into growth initiatives across the business. Approximately R24 million of the investment was into capital expenditures with R24 million operating expenditure, primarily new talent in growth areas, attracting R20 million investment, and R4 million into cost of sales. From a divisional perspective, R18 million was invested into Infrastructure Services and R16 million into IT initiatives. R6 million has been invested into the Operational Technologies East and West Africa expansion.

EOH has made great strides over the past few years in streamlining its operations and structures, including reducing corporate overheads and inefficient expenditure. There is further work required to ensure tax efficiency, which is a key focus area, and EOH will continue to eliminate inefficient expenditure to keep the business as lean as possible.

EOH’s skills base is the core of the Company, and it is immensely proud of the tenacity and perseverance that all our people have demonstrated during this extremely difficult period. A key milestone has been EOH receiving the Top Employer certification from the Top Employers Institute, the global authority on recognising excellence in people practices. EOH can now build on this foundation to further invest into its talent to ensure that it remains an employer of choice in the IT industry and continues to offer clients the best solutions and implementations available.

South Africa is going through an immensely challenging period as it battles low growth, high unemployment, persistent loadshedding, high inflation, rising interest rates, a weakening currency, grey listing by FATF and deteriorating investor sentiment. Against this difficult backdrop, EOH management is extremely proud to have concluded the successful capital raise, allowing for a normalised capital structure with a future that is more within its own control.

Notably, the IT sector itself shields EOH from the full negative effects of the above-mentioned negative factors. This, as companies look for efficiency gains and more strategic use of information to maintain competitiveness, often turning to technology improvements that provide these solutions. Being at the forefront of the IT industry allows EOH to assist clients in their digitisation journeys as the Group leverages its end-to-end technology stack and development expertise.

EOH’s growth into East and West Africa through its exclusive AVEVA distribution and the investments into Europe and the Middle East through existing operations also provide further revenue growth potential and geographic risk diversification.

At a Group level, EOH saw an 8% increase in continuing revenue compared to H1-2022. This was primarily driven by the double-digit growth in our IT Infrastructure Services and Enterprise Apps and Software Reseller businesses, and the 20% growth in our Digital business. Revenue growth was held back by Operational Technologies, where the inability to close certain contracts with state-owned entities (“SOEs”) resulted in a 10% reduction in revenue. The NEXTEC People business also had a 13% revenue reduction due to the non-renewal of certain contracts and termination of unprofitable contracts, however, it kept its EBITDA intact.

At a continuing gross profit level, EOH maintained margins for continuing operations at 29%, with the long-term target being 30%.

Continuing operating expenses compared to H2-2022 have been well managed and are down from R892 million to R824 million. The comparable H1-2022 operating expenses of R699 million benefited from significant one-offs of R50 million in provision reversals, recovery of previous debt and cash written off. Once these one-offs have been stripped out, costs saw a 10% year-on-year increase.

EOH achieved R181 million adjusted EBITDA from continuing operations for H1-2023 compared to R278 million in H1-2022 (full FY2022 adjusted EBITDA was R364 million).

Adjusted EBITDA for H1-2022 included a large benefit from provision reversals and recovery of previous debt and cash written off of R50 million and R20 million of recovery from IP businesses for corporate costs which are no longer received. NEXTEC performance was also comparatively worse than the prior year by R20 million as the business continues to be turned around. Once these adjustments have been taken into account, EBITDA was effectively flat for H1-2023 compared to H1-2022.

Operating profit from continuing operations was R110 million for the period at a margin of 3.4%, (H1-2022: R162 million) comparing favourably to the R100 million operating profit from continuing operations for the full year 2022 at 1.7%.

The net finance cost for H1-2023 of R98 million is slightly higher than H1-2022 despite the paydown in debt levels since the financial year end. This demonstrates the impact of the sharp rise in interest rates during 2022 together with the onerous interest charge on the bridge facility of close to 16%, and underlies the necessity of EOH’s capital raise after the half-year end, the benefit of which will start flowing through in H2-2023.

Our tax efficiency remains a key focus area as we improve our corporate structures to normalise the tax charge. EOH incurred a loss after tax from continuing operations for H1-2023 of R37 million.

Working capital and liquidity management are key focus areas of the business with net working capital of R253 million and cash at the end of the period of R227 million. Debt at 31 January 2023 was at R1 228 million and has subsequently been reduced to R673 million after paying down the bridge finance with the proceeds of the capital raise. The remaining debt has been refinanced through The Standard Bank of South Africa Limited at significantly improved interest rates reflecting the normalised capital structure and improved performance of the Group. The benefits of the revised debt package will start to be recognised in H2-2023.

Cash generated from operations after changes in working capital was R5 million.

The Digital Enablement businesses experienced strong growth in H1-2023 with a 20% increase in revenues over the comparable period, led by our International business (45% increase) which now contributes 33% of the business unit’s revenue. The Digital business also performed well from an EBITDA perspective, increasing to R108 million from R83 million in H1-2022.

The growth in revenue in the IT Infrastructure, which includes data centre and managed services, and network, cloud and security solutions, also showed pleasing growth in revenues of over 13%. EBITDA at R32 million was flat on a comparative basis as EOH invested in upgrading infrastructure.

The Operational Technologies business had a challenging six months due to the inability to close contracts with SOEs, which impacted revenues and EBITDA. Profitability in this business was further held back by certain high-margin contracts rolling off in FY2023 and the investment into East and West Africa. Compared to H1-2022, revenue was down 10% to R230 million and EBITDA down 45% to R26 million.

The Enterprise Applications and Software Reseller saw 10% revenue improvement to R634 million, with EBITDA slightly up at R61 million compared to R56 million at H1-2022. This business suffered from industry-wide margin compression from OEMs, however management has made some strategic interventions and expect the margins to stabilise going forward.

The Platforms business had a steady performance from a revenue and EBITDA perspective compared to last year. Revenue increased 3% to R203 million and EBITDA increased 9% to R23 million.

The NEXTEC Infrastructure Solutions business saw a pleasing 11% increase in revenues to R593 million, driven predominantly by our mesh networks business over-performing. However, one of our water platform businesses, which is solely dependent on the public sector for business, suffered a big drop in revenues in H1-2023, which impacted profitability significantly during this period compared to H1-2022. EBITDA for the Infrastructure Solutions business dropped from R4 million to a loss of R8 million. However, this business, which has received significant turnaround attention over the past year, showed a very encouraging improvement from H2-2022, with EBITDA reducing from a loss of R46 million to R8 million. As stated in the FY2022 results, the goal is to get this business to break even in FY2023.

The NEXTEC People business revenue dropped 13% to R291 million. A key client lost its contract with an SOE which had a knock-on impact on our Impact HR business, as well as the termination of certain unprofitable contracts during the period. However, the division was more profitable during the period with EBITDA margins increasing by over 2%, delivering a 5% EBITDA increase to R37 million in spite of the revenue decrease.

EOH has spent significant time over the past few months optimising and aligning its suite of products and services and refining how it approaches the market. With the asset sale process aimed at reducing legacy debt now complete, EOH has a stable portfolio of products and services. The Group will approach the market through four key product pillars; namely Digital Enablement, IT Infrastructure Services, Operational Technologies and EasyHQ. The International business outside of sub-Saharan Africa will focus mainly on Digital Enablement and selling of own IP Platforms. The Executive Committee has also been aligned along these pillars, improving efficiency and accountability in our reporting structures. On a go-forward basis, EOH will look to align the reporting to this structure.

Four key product pillars

The changes to reporting structures and refinement of the strategy outlined above are currently being implemented and will be used for financial reporting at the year-end results.

Subsequent to the period end, the Group closed the rights issue on 10 February 2023 with an aggregate amount of R500 million raised and R100 million from the specific issue. After costs, a net R555 million was applied against the bridge facility with R173 million outstanding.

With the completion of the rights issue, the Group has subsequently concluded a term sheet with The Standard Bank of South Africa Limited (acting through its Corporate and Investment Banking division) to refinance the remaining debt into the following package:

• R200 million four-year amortising term loan;
• R250 million three-year bullet term loan;
• R250 million four-year revolving credit facility; and
• R500 million general banking facilities which will include a working capital facility and ancillary banking facilities

Interest rates on the above facilities range between JIBAR +2.65% per annum to JIBAR +4% per annum, dependent on the leverage ratio.

The Group now has an appropriate capital structure to enable its Growth strategy.

Despite the economic headwinds faced in South Africa, EOH is well-placed for profitable growth with its full stack of technology offerings, diversified client base, as well as its strong international performance.

With the capital raise now complete and a more appropriate capital structure in place with reduced interest payments, EOH is now well-positioned to execute its growth strategy and capitalise on the growing demand for digital transformation across its client base.

Stephen van Coller
Group Chief Executive Officer

5 April 2023