EOH : Pre-closing stakeholder update

Pre-closing stakeholder update

EOH HOLDINGS LIMITED
(Incorporated in the Republic of South Africa)
(Registration number 1998/014669/06)
JSE share code: EOH
ISIN: ZAE000071072
("EOH" or the "Group")


PRE-CLOSING STAKEHOLDER UPDATE


Background

At EOH's annual results released on the 28th of October 2021 for the period ended 31 July
2021 ("FY2021"), EOH reported a return to positive operating profit and a significant
improvement in gross profit, adjusted EBITDA and operating profit margins. This was
achieved through the right-sizing of the business, closing out of legacy loss-making contracts
and a focus on improving the quality of earnings. This culminated in a 96% improvement in
the total headline loss per share to 22 cents. The Group reduced total debt from R2.5 billion to
R2.0 billion in FY2021 and is concluding a Common Terms Agreement ("CTA") with the
lender group, with the main features being a R500 million 3-year senior bullet facility and a
R1.5 billion bridge facility, maturing in October 2022. The refinancing of the existing debt
package is a key milestone as the new debt package gives management the opportunity to
determine the optimal capital structure for the business going forward and as it shifts focus
towards re-embarking upon its growth strategy.

EOH is now providing its stakeholders with an update on trading conditions and performance
during the first six months of the 2022 financial year ("FY2022").

Operating environment

The Group is one of Africa's largest technology service providers and continues to be a market
leader in its core ICT business, with a diversified base of over 5,000 clients across a growing
international footprint. Although the South African and international operating environment
remains challenging, the convergence of digital technologies provides EOH with an
opportunity to take advantage of these trends as clients continue to pursue their own digital
transformation and automation strategies.

The EOH Board and management team has focused on transforming the business through a
complete organisational restructure, implementation of a new strategy, corporate governance
overhaul and stabilisation of its capital structure. The business has been restructured to be more
client-focused, creating significant opportunity for organic growth driven by cross-sell
opportunities. Having largely completed its restructure, EOH is at the point where it requires a
right-sized capital structure to set the business up for the resumption of a growth-led strategy.

Financial performance

The Group has experienced headwinds from a revenue perspective due to the tough economic
conditions under COVID-19 and the emergence of the latest Omicron variant. In response, the
Go-to-Market Strategy has been reinvigorated with the Group starting to see the benefit to
customers where the delivery of holistic solutions is key.

Further, notwithstanding these headwinds the Group has maintained margins across the board.
This has been as a result of the focus on enhancing the quality of the revenue base, with largely
all the legacy loss-making contracts having been closed out in FY2021, as well as a focus on
cost reductions.

The unbundling of the Group's cumbersome operating structure through the consolidation of
shared services is at an advanced stage and near completion. This is in line with the Group's
focus on creating efficiencies and evolving into an adaptable organisation that is able to
navigate changing macro-economic dynamics.

iOCO

iOCO continued to post an operating profit and positive adjusted EBITDA in the first half of
FY2022 despite the constrained economic environment and ongoing disruption arising from
the emergence of the Omicron variant in November 2021. This was largely due to the
realisation of optimisation initiatives and cost efficiencies, which offset revenue pressure.

As part of the Group Strategy aimed at evolving the business model, iOCO has established
"Infrastructure as a Service" (IaaS) as an end-to-end service offering. The IaaS offering
comprises the Managed Services and Connectivity businesses and the Compute platforms
business, which was previously included in iOCO Technology. The establishment of IaaS has
resulted in higher margins and lower operating costs on hardware sales which has partially
offset slower revenue growth. The strong focus on IaaS, particularly on cloud solutions, has
positioned iOCO to take advantage of a large secular trend in technologies services that is
expected to continue growing in the long term.

Focus is being applied to the businesses remaining in the iOCO Technology cluster, our
enterprise applications and software reseller business, which have experienced subdued
software sales, supplier-led margin reduction and cost increases. iOCO Digital, one of the
fastest growing clusters, delivered a solid performance in line with expectations. Growth within
iOCO Digital has been achieved in other key areas such as the International and Consulting &
Advisory businesses, with market demand increasing in the Cloud, Automation and the
Application Development businesses.

The iOCO business is now a well-balanced business, focused on the management of IT
infrastructure, operational technology, enterprise application software and the holistic
digitisation of our clients' businesses. This configuration ensures that our customers are fully
supported across the ICT value chain.

NEXTEC

The NEXTEC business continues to focus on achieving quality earnings, with improved gross
profit and adjusted EBITDA margins achieved in the first half of FY2022 compared to the
comparative period in FY2021. The NEXTEC People Solutions business performed well over
the period and is tracking ahead of adjusted EBITDA expectations. The NEXTEC
Infrastructure Solutions business was impacted by contract delays and international supply
challenges, but this was partially offset by the outperformance of projects in the mining
industry, related to demand for mesh communication networks and the positive momentum in
our consulting businesses which is a leading indicator for industrial development in the
country. The NEXTEC businesses that remain core to EOH are self-sufficient from a liquidity
perspective.

Update on asset disposals

As part of the strategic plan to deleverage the Group, EOH has identified a number of
businesses for disposal in addition to those that have already been successfully sold. The Sybrin
sale announced in June 2021 is expected be concluded in February 2022, generating net cash
proceeds of c. R280 million. The parties are currently awaiting final regulatory approval in one
remaining African jurisdiction. EOH expects total cash proceeds from the disposal of non-core
assets to be c. R750 million (including Sybrin) by financial year end. These proceeds will be
used to further deleverage the balance sheet.

Liquidity and capital structure

The continued improvement in revenue and cash generation across the Group, the closing of
onerous contracts, the efficiencies achieved in working capital management and the disposal
of non-core assets has significantly improved the liquidity position of the Group. Cash
balances, as at 27 January 2022 are c. R722 million, including foreign and restricted cash, but
excluding the undrawn R250 million overdraft facility which remains at EOH's disposal. This
improved liquidity position, coupled with positive lender engagement has helped stabilise the
balance sheet.

The R1.5 billion bridge facility maturing in October 2022 will be partially repaid using the
c. R750 million proceeds received or to be received from asset disposals. The EOH Board and
management are considering strategic options to settle the remaining R750 million as well as
raise liquidity to pursue growth opportunities. Having largely concluded the sale of non-core
assets, these options primarily comprise an equity raise from existing and/or new investors, the
introduction of mezzanine debt, a combination of the above solutions or the further disposal of
assets. New investors may include investors that could assist with increasing the Group's BEE
ownership as well as potential strategic partners.

Given the current high costs of debt funding, capital scarcity and arrangements with lenders,
the optimisation of the balance sheet is a key priority for the EOH Board and management
team. Given the continued improvement of EOH's trading performance, the EOH Board and
management team believe this is the appropriate time to engage with shareholders, lenders and
the market more broadly to determine the optimal solution for the company. The EOH Board
and management team have appointed financial advisors to assist the Group in evaluating its
strategic options.

Outlook

EOH's full stack of technology offerings and diversified client base ensure the Group is well
positioned for growth as the local economy enters the post-COVID recovery phase. Demand
for IT services and products remains robust and EOH's product offering enables it to capture
this demand as well as increase its market share. Confidence in our outlook is underpinned by
our revitalised commercial strategy which is geared towards driving customer solutions and
attracting new customers. As the business' cashflow generation improves, EOH can focus on
scaling its early-stage IP companies with differing value propositions (namely core banking
software, HR software, business process digitisation software and fraud detection software).

The financial information contained in this pre-closed period stakeholder update has not been
reviewed or reported on by PricewaterhouseCoopers Inc., the Group's independent external
auditors.

28 January 2022


Sponsor
Java Capital

Date: 28-01-2022 12:00:00
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