First appeared in Daily Maverick 168

Granted, apart from Covid-19, the company has had a lot on its plate due to irregularities, fraudulent contracts, premature recognition of revenue and a number of other factors that resulted in a crisis under its previous management – and a big restatement of its accounts for the past few years.

Former investment banker Stephen van Coller has been leading a clean-up since he took over as CEO in 2018, including a review of its financial reporting process. Last year, a forensic report by law firm ENSafrica uncovered suspicious transactions worth R1.2-billion. EOH was hit with a R7.5-million fine by the JSE in July – with R2.5-million suspended for the next five years. 

It all culminated in Van Coller’s two-hour appearance before the Zondo commission late last month, where he outlined the misdeeds and detailed how he had prioritised clean governance. ENS also appeared before the commission, implicating the ANC and a number of its top officials in the suspected tender influencing in return for donations.

Not wanting to steal the limelight from a big improvement in its performance, Van Coller told TechCentral that they decided on the second postponement. With new auditors on board, he said the group also had to make sure it presented a clean slate to shareholders, who have been the biggest losers in the whole debacle of the past few years.

And there is a big improvement: it’s generated a lot more cash from its operations, once-off expenses are shrinking and so is debt. It has sold 81 businesses over the past 18 months, raising R1.6-billion, enabling it to reduce debt from R4-billion when Van Coller took over to about R2-billion at the beginning of this month.

It still has some way to go, though, and the uncertainty created by Covid-19 has stalled the sale of a few businesses in the IP unit that it’s busy winding up. Its auditors raised a red flag over a refinancing of debt that is due in April 2021. 

EOH says discussions with its lenders on a long-term capital structure are far advanced but it’s been a tough process as, until recently, it was difficult to determine the earnings it was measuring the debt against, given the previous overstatements. Now that they are getting to the bottom of the numbers, there’s a floor to work from.

The group’s ability to repay debt as it becomes due is dependent on the timing and quantum of cash inflows from operations and its ability to realise cash from the sale of non-core assets. As a result, its auditors say a material uncertainty exists that could cast doubt on the group’s ability to continue as a going concern if the refinancing is not concluded with lenders.

The auditors might be being pedantic – and Van Coller said he’s glad they highlighted the key issue. However, it’s believed that the company already has a new financing agreement in place with its banks and is just waiting for the formalities to be concluded. With better-than-expected cash flow and lower interest rates, Van Coller said the pressure was off to sell the IP assets in the short term. It wants full value for the businesses and doesn’t want to sell at a big discount to buyers who remain cautious.

EOH says the path is clearly set for it to capitalise on future growth prospects. These include an expansion into the Middle East using its business in Egypt as a springboard. While the story sounds good, it will take a good few chapters before its shares return to levels of a few years ago when they traded north of R170. 

Banks look after (some of) their own

Banks’ shareholders have been dealt a double whammy this year, with share prices slumping and the likely prospect that they won’t get any dividends at all.

So far, Investec is the outlier. That hasn’t, however, stopped banks including Standard Bank and FirstRand from tweaking executive reward schemes to compensate top management for losses they’ll incur due to Covid-19.

Despite a tentative recovery from the grim second quarter when the pandemic rippled across the economy, Absa, Nedbank and Standard Bank have already told shareholders not to get their hopes up. That’s despite all the banks remaining capitalised well above minimum regulatory requirements. 

Absa has all but ruled out a final dividend, while Standard Bank and Nedbank say they’ll have to consider a number of factors, including the guidance of the Reserve Bank’s Prudential Authority (PA). They all held back on interim dividends in June after the PA issued a guidance note advising them to preserve capital by withholding dividends and executive bonuses. That guidance still stands, the PA says, but it is just that – guidance.

After holding back on a final payout for the year to end-March, Investec recently declared an interim dividend despite a halving of first-half earnings due to Covid-19. It said it was encouraged by the resilience of its loan book and the performance of its core franchises.

Sure, Standard Bank says it will take years to get bad debt levels back to where they were before the crisis. Still, it’s adjusting its long-term incentive plan for senior executives to keep them onside. The same with FirstRand. While its trading statement a week ago didn’t make mention of a dividend, its annual report outlined an additional incentive programme to make up for the impact of the pandemic on the share-based rewards of top management.

While it’s clearly important that management is motivated to deliver value for all stakeholders, that includes return on investment for shareholders. Dividends are part of that.

The PA said this week that its view of the banking sector was still that it remained sound and adequately capitalised. While its guidance is not legally binding, it may be that the so-called Big Four banks want to stay on its good side. It looks as though Investec has retained the chutzpah of former long-serving CEO Stephen Koseff in making its decision. 

Altron unveils pre-Christmas boon

Altron’s shareholders can probably thank the development of Covid-19 vaccines for the improved price it hopes to achieve when it lists its Bytes UK business on the London Stock Exchange (LSE) later this month. The company started laying the groundwork for the listing of the software services and solutions group back in early April as it looked for ways to unlock more value for shareholders after selling off a number of other businesses as part of a large restructuring. It believes the true value of Bytes isn’t reflected in its share price – which will become evident if it achieves what it expects to with the IPO.

It has always hinged on market conditions and appetite for Bytes’ shares and sentiment has clearly improved with an end now in sight to the lockdown conditions that have hampered economies across the globe. At the end of October, Altron expected to achieve a market capitalisation of at least £450-million (R9.23-billion) on the LSE. In the prelisting statement and prospectus released this week, it raised the price it expects to fetch for its shares to the extent that it will have a market capitalisation of between £574-million (R11.8-billion) and £692-million (R14.2-billion). Altron is worth just more than R13-billion.

That’s an additional windfall for shareholders, who’ll be given shares in Bytes through its secondary listing on the JSE. While Bytes itself doesn’t get any of the proceeds, it says the London listing will raise its profile and help it build on the growth it’s achieved over the past few years due to the shift to cloud computing, as well as the rise in home working that has resulted from Covid-19.

It looks like a classic case of the child outgrowing the parent. DM/BM