EOH implicated in tender award corruption activities in latest legacy issue

EOH Holdings' share price declined by more than 2 percent on the JSE after the information technology (IT) group was implicated in another set of corruption activities at the weekend when a middleman accused EOH of having benefited from a R1.2 billion tender illegally.

The middleman, Lubabalo Nojiwa, filed court papers two weeks ago and claimed to have used his connections to persuade the City of Joburg to award the tender to EOH at the expense of two other IT companies, Gijima and Accenture. EOH's share price declined to its lowest level yesterday at R17.15 a share before reversing some of the losses and closed at R17.66, 0.06percent lower at the end of the day.

The company was not available for comment yesterday after promising to do so before the end of the day. However, the group has tried hard to clean its image after appointing Stephen van Coller as chief executive in July last year. Van Coller, together with the board, appointed ENSafrica following Microsoft’s termination of contract with EOH subsidiary EOH Mthombo in February.

The ENSafrica investigation found evidence of a number of governance failings and wrongdoings at EOH, including unsubstantiated payments, tender irregularities and other unethical business practices which are primarily limited to the public sector business centralised in EOH Mthombo and to a limited number of EOH employees. “Suspicious transactions of R1.2bn have been identified and are being investigated by ENSafrica,” the report revealed earlier this month.

Peter Takaendesa, a portfolio manager at Mergence Investment Managers, said this unfortunate development clearly showed that the ENS investigation had not yet uncovered all the legacy problem areas. “Our view remains that the EOH board has done well to appoint new executives and improve the independence of the board, but legacy issues are likely to require more attention to resolve over the medium term.

"There are a number of factors that inflated EOH’s growth rate, and it is clear that the new EOH has to look very different from the EOH of the past decades,” Takaendesa said. He added that the sustainability of any share price recovery was very dependent on the successful disposal of assets to strengthen the balance sheet, improved profitability in remaining operations, improved cash generation in the business and no other major suppliers terminating their relationship with EOH.

“There are still risks related to legacy issues until both the Microsoft and ENS investigations are completed and the capital structure needs to return to sustainable levels. "The longer some these uncertainties remain unresolved the longer they will translate into weaker financial performance in later periods, as they make it difficult for the company to enter or renew long-term customer contracts at normal industry profitability levels.

"The South African IT market remains tough and competition is increasing (stronger Altron and BCX), while EOH is still dealing with legacy headwinds,” Takaendesa said.