JSE-listed information and communications technology services company EOH said the operating environment in South Africa continues to be challenging and the global economy remains under pressure, with growth forecasts downgraded on the back of inflationary pressures and geopolitical tensions caused by the ongoing Ukrainian conflict, Covid-19 lockdowns in China and the ceasing of quantitative easing in developed markets, besides others.

In an update to stakeholders on trading conditions and events during the first six-month period of its financial year ending July 31, it added that supply chain disruptions have continued through the period, which have slowed down EOH's project delivery.

In South Africa, the prolonged macroeconomic effects of the pandemic, July 2021 riots, the flooding in KwaZulu-Natal, the lack of investment in the mining and rail sectors, as well as the increased frequency and severity of loadshedding, are placing severe strain on the economy.

"The EOH board and management team continue to monitor these developments and to proactively manage their impact on the group's business, while maintaining focus on delivering current financial targets and implementing the capital restructuring strategy," the company said in a statement.

Historically, EOH has performed better in the second half of the financial year compared with the first half. However, this was not the case in the 2022 financial year, predominantly owing to the challenges faced in Nextec's Infrastructure Solutions and iOCO's Software Reseller and Enterprise Applications divisions, as well as the timing of once off items, including provisions for Special Investigating Unit settlements, goodwill impairments, the loss on sale of assets and financial impairments related to the lease receivable book, which all primarily arose in the second half of the financial year.

In light of the timing issues and management actions taken to address the specific iOCO and Nextec challenges, EOH is operationally well positioned to produce improved results for the full 2023 financial year, the company said.

"Despite the challenging operating environment, EOH's continuing operations for the five months ending December 31, 2022, have performed in line with budgets, achieving revenue growth above inflation and the prior period. Gross margins in the first half of the 2023 financial year have remained stable when compared to the continuing operations for 2022 full financial year.

"The group has also seen strong performance at earnings before interest, taxes, depreciation and amortisation (Ebitda) and operating profit level, as the business resets and embarks on its growth strategy," EOH stated.

While EOH reduced debt levels from R1.3-billion to R1.2-billion at the 2022 financial year-end, the increased refinancing costs incurred under the new common terms agreement, along with higher repo rate levels, have resulted in only a modest reduction in the finance cost in comparison to the prior period the first half of the 2022 financial year.

"The proposed capital raise, comprising a R500-million rights offer and a R100-million specific issue of shares for cash to EOH's black empowerment partner Lebashe Investment Group, therefore, remains a strategic imperative to allow it to reduce its debt levels, gain access to cheaper forms of debt and secure less onerous lending terms."

EOH has concluded a term sheet with Standard Bank Corporate and Investment Banking, subject to the successful conclusion of the capital raise, the application of the capital raise proceeds towards a partial reduction of existing debt and the satisfactory conclusion of written agreements together with the fulfilment of conditions precedent, to refinance the remaining debt into a new package.

This new debt package would comprise a R200-million four-year amortising term loan, a R250-million three-year bullet term loan, a R250-million four-year revolving credit facility, and R500-million general banking facilities, which will include a working capital facility and ancillary banking facilities.

"This will ensure that the group emerges from the capital raise with a sustainable capital structure, allowing management to focus on driving growth in the operations," the company averred.

Significant interest has been shown in the rights offer, which EOH expects to be fully de-risked through a combination of irrevocable commitments to follow rights and underwriting commitments at the time of launch, it added.

"While the group has continued to deliver on its strategy and shown growth from a top line level and strong momentum on operating profit, it remains cautious about the local and global economic and political environment. The EOH board and management continue to monitor these issues regularly to ensure that EOH remains agile as a group."

DIVISIONAL PERFORMANCES
Meanwhile, iOCO continued to show strong growth from a top line perspective. This has most notably been seen in the digital business, which has delivered top line growth in excess of 10% for the five-months to the end of December period. iOCO Digital continues to support its customers in their digital transformation journeys, with growth in this segment of the business having accelerated since Covid-19.

Further, following certain successful resourcing and structural changes, there has been a healthy rebound in the Enterprise Application and Software business, with growth in excess of 10% being a key contributor to iOCO's growth for the five-month period.

"The iOCO Infrastructure Services business showed solid and consistent performance relative to the prior half-year period. The top line was, however, impacted by supply chain issues where orders have been received from customers, but remain unfulfilled owing to stock shortages."

The Operational Technologies business also performed well, considering the current economic backdrop of constrained State-owned enterprise investment and delayed spend which negatively impacted year on year performance. The Operational Technologies business continued to invest in East and West Africa and its other organic expansion plans.

"Overall, the iOCO forward pipeline looks strong. The five-month period again saw good wins and multiyear awards, as customers continued to demonstrate their trust in iOCO to deliver on their digital and technology journeys," EOH said.

Additionally, the People Solutions business of the Nextec division continued its solid Ebitda performance from the prior year into the first five months of the 2023 financial year. Specific focus and a clear strategy are currently being outlined for opportunities that management believes are relevant in light of current market conditions.

The Infrastructure Solutions business faced significant challenges in the 2022 financial year, requiring a strong focus on turning around the business. The turnaround has continued into the first half of the 2023 financial year with the rightsizing of specific operations.

"While this right-sizing limited revenue growth opportunities for the business, it was counteracted by our mesh network business that outperformed for the five-month period. This Infrastructure Solutions business continues to feel the effects of project delays primarily in the public sector," EOH said.

Meanwhile, the international business has continued its growth path, with revenue continuing to grow at double digit rates, as the business increased its staff complement and product offerings.

"While small relative to the rest of the business, we believe that at its current trajectory, it will become an important contributor to the group in the medium-term, allowing South African and Middle East customers to replicate their information technology across the Europe, Middle East and Africa time zone, as well as balancing the group's portfolio, opportunity and risk across various regions and economies," EOH stated.

TOP EMPLOYER
EOH also reported that it was receiving a Top Employer certification from the international employment practices organisation Top Employers Institute, which it said demonstrates its success in building a forward-thinking workplace that allows its diverse people to grow and thrive.

The certification also signals that the EOH Group is well-equipped to implement its growth strategy in 2023, said EOH Group CEO Stephen van Coller.

“The award indicates that our improved people and culture practices are in line with the highest global standards and that we are well on our way to making EOH one of the coolest places to work in the technology industry,” he added.

“The EOH Group is committed to building a culture and work environment where our people feel valued and have the opportunity to realise their potential. We have worked hard on our employee value proposition, as we believe our people are our key asset. We are therefore delighted that we have been recognised by a reputable global organisation as a business that puts its people first.”

The company participated in the Top Employer programme to benchmark itself against international best people practices and obtain a roadmap for continuous improvement of its employee value proposition. The process involved a detailed audit of a company’s performance across six human resources elements made up of 350 sub-areas based on supporting evidence.