Notes to the interim condensed consolidated financial statements
1. REPORTING ENTITY
EOH Holdings Limited ("EOH" or the "Company") is a holding company domiciled in South Africa that is listed on the JSE Limited under the category Technology: Software and Computer Services. EOH is one of the largest ICT service providers in South Africa and is committed to providing the technology, knowledge, skills and organisational ability critical to the development and growth of the markets it serves. The interim condensed consolidated financial statements of EOH, as at 31 January 2022 and for the six months then ended, comprise the Company and its subsidiaries (together referred to as the "Group") and the Group's investments in associates and joint ventures.
2. STATEMENT OF COMPLIANCE
The interim condensed consolidated financial statements have been prepared in accordance with the framework concepts and the measurement and recognition requirements of International Financial Reporting Standards ("IFRS") and its interpretations adopted by the International Accounting Standards Board ("IASB") and comply with the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee and Financial Pronouncements as issued by the Financial Reporting Standards Council, and contain at a minimum the information required by IAS 34 Interim Financial Reporting, the requirements of the Companies Act 71 of 2008 of South Africa and the JSE Limited Listings Requirements.
These interim condensed consolidated financial statements were compiled under the supervision of Megan Pydigadu CA(SA), the Group Chief Financial Officer ("CFO").
3. BASIS OF PREPARATION
The accounting policies and methods of computation applied in the preparation of these interim condensed consolidated financial statements are consistent with those applied in the previous consolidated annual financial statements.
The interim condensed consolidated financial statements do not include all the notes of the type normally included in a set of consolidated annual financial statements. Accordingly, this report is to be read in conjunction with the consolidated annual financial statements for the year ended 31 July 2021.
The interim condensed consolidated financial statements have been prepared on the historical cost basis, except for certain financial instruments that are measured at fair value through profit or loss at the end of each reporting period.
The interim condensed consolidated financial statements are presented in South African Rand, which is the Group's presentation currency, rounded to the nearest thousand except for when otherwise indicated. The going concern basis has been used in preparing the interim condensed consolidated financial statements as the directors have a reasonable expectation that the Group will continue as a going concern for the foreseeable future. Refer to note 4 for further information.
The comparative financial information in the interim condensed consolidated financial statements has been restated based on information available at 31 January 2022. Refer to note 6 for further information.
The interim condensed consolidated financial statements have not been audited or reviewed by the Group's external auditor.
4. GOING CONCERN
The IFRS Conceptual Framework states that going concern is an underlying assumption in the preparation of IFRS financial statements. Therefore, the financial statements presume that an entity will continue in operation in the foreseeable future or, if that presumption is not valid, disclosure and a different basis of reporting are required. The board of directors ("Board") believes that, as of the date of this report, the going concern presumption is still appropriate and accordingly the interim condensed consolidated financial statements of the Group have been prepared on the going concern basis.
IAS 1 Preparation of financial statements ("IAS 1") requires management to perform an assessment of the Group's ability to continue as a going concern. If management is aware of material uncertainties related to events or conditions that may cast significant doubt upon the Group's ability to continue as a going concern, IAS 1 requires these uncertainties to be disclosed.
In conducting this assessment, the Board has taken into consideration the following factors:
The financial performance, condition and cash flows for the Group reflect an operating profit of R167 million for the half-year, net asset value attributable to the owners of EOH Holdings Limited at the end of the period of R202 million and cash inflows from operating activities of R124 million (including continuing and discontinued operations). Details of the financial performance, condition and cash flows for the Group are explained in the interim condensed consolidated financial statements. A detailed action plan for deleveraging the Group to a sustainable level and resolving the "fit-for-purpose" cost structure was developed by the Group and its lenders and committed to in October 2019, revised in April 2020, November 2020 and October 2021. Since its announcement in October 2019, the plan has been largely executed against and the Board reasonably believes it can continue to be implemented going forward in order to ensure the Group's ability to continue as a going concern.
The key deliverables implemented by the Group in relation to the deleveraging plan have been focused around the disposal of assets. The sale of Sybrin was announced in June 2021 and final conditions precedent were met on 31 March 2022. Proceeds received from the sale of Sybrin, as well as other smaller disposals, has reduced the outstanding debt by R360 million since 31 January 2022. A share purchase agreement relating to the disposal of the remaining IP asset, InfoSys, was signed on
11 March 2022. The suspensive conditions relating to this disposal including shareholder approval are in the process of being executed with anticipated timing for final conditions to be met by the end of May 2022. Proceeds from the disposal of InfoSys will also be utilised to reduce the overall debt of the Group by approximately a further R425 million.
The Group has also completed the execution of an amended and restated common terms agreement ("CTA") with its lenders with the following split of debt:
- A R500 million three-year bullet facility.
- A bridge facility of R1 .2 billion repayable on 1 April 2023.
The bridge facility will be partially repaid from the disposal proceeds to be received from the InfoSys disposal. In addition, the Board and management are considering strategic options to settle the remaining R750 million, as well as to raise equity to pursue growth opportunities. These options primarily comprise an equity raise from existing and/or new investors, the introduction of mezzanine debt, a combination of these or 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. The Board and management team have appointed financial advisers to assist the Group in evaluating its strategic options.
Executive management and the financial advisers have had initial discussions with a range of investors to discuss its strategic options. Feedback from these discussions have been positive and will enable the management team and its financial advisers to assess the most optimal solution in terms of the capital structure of the organisation.
The Group has also implemented initiatives to improve liquidity and has proven its ability to be agile and respond to new challenges as required. The Group has R625 million of net cash as at 31 January 2022 and access to overdraft facilities of R250 million. These overdraft facilities have remained undrawn for the last several months.
The Group over the past year has revised its go-to-market strategy and brought in an industry veteran to spearhead the commercial strategy for the Group and improve the quality of revenue.
The directors' assessment of whether the Group is a going concern was considered and the directors concluded that:
- The Group is solvent and is expected to remain solvent after considering the approved budget and expected performance;
- While the Group's current liabilities exceeded its current assets by R1.6 billion, with the subsequent events of signing the amended and restated CTA, disposals underway to partially repay the bridge facility as well as the work underway to resolve the capital structure of the Group, this will result in current assets exceeding current liabilities;
- There is an approved forecast for the following 24 months;
- There are cash flow forecasts for the following 12 months, which were interrogated and adjusted for anomalies for each of the periods under review together with a detailed review of once-off cash payments; and
- The Group has sufficient access to facilities and liquidity events to fund operations for the following 12 months based on the following assumptions:
- improved operational performance;
- the sale of non-core assets, which are at a relatively advanced stage;
- the Group's assets are appropriately insured; and
- there is currently no outstanding litigation, that the directors believe has not been adequately provided for that could pressurise the Group's ability to meet its obligations.
The Board remains focused on and committed to the turnaround strategy and improving the capital structure.
The Board, after considering the negotiated terms and mitigating actions described above, has concluded that the Group should be able to discharge its liabilities as they fall due in the normal course of business and is therefore of the opinion that the going concern assumption is appropriate in the preparation of the interim condensed consolidated financial statements.
5. NEW AND AMENDED STANDARDS ADOPTED BY THE GROUP
Certain amendments to accounting standards became effective from 1 August 2021. These did not have a material impact on the Group.
6. RESTATEMENT OF INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The previously reported January 2021 half-year results were prepared prior to the finalisation of restatements, which finalisation only occurred during the year ended 31 July 2021. Consequently, the January 2021 results have now been restated to align with the final conclusions and restatements set out in the 2021 consolidated annual financial statements.
During the year ended 31 July 2021, management identified three matters which were incorrectly accounted for or presented in prior periods. These three matters require restatement to the January 2021 half-year results:
- SARS VAT Voluntary Disclosure Programme ("VDP") liability (6.1);
- Fair value adjustments on treasury shares not eliminated on consolidation (6.2); and
- Expired Vendors For Acquisition ("VFA") balance within other reserves (6.3).
The 2021 interim condensed consolidated statement of profit or loss and other comprehensive income and interim condensed consolidated statement of changes in equity have been restated to correct the prior period errors.
The restatements had no impact on any line item in the statement of financial position as at 31 July 2021 and therefore the statement of financial position at 31 July 2021 remains as previously reported. The restatement adjustments are all non-cash adjustments and therefore do not impact cash generated before working capital changes or any other line items on the interim condensed consolidated statement of cash flows.
A brief explanation of each category of error is provided below, following which an analysis is included of the financial impact on the affected financial statement line items:
| 6.1 | SARS VAT VDP liability | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
During the disposal process of one of the discontinued subsidiaries in the Group, a tax due diligence finding was raised, regarding VAT not raised on services billed from the subsidiary to another foreign entity within the Group for the period August 2013 to 28 February 2021. The invoices were zero rated as export services to the foreign entity under the Income Tax Act of South Africa section 11(2)l, although after consultations with Senior Counsel, the opinion was that these services were being rendered to a tax resident, while the foreign entity was not carrying on an enterprise in South Africa, it was tax resident for income tax and by default should be a resident for VAT. Therefore, section 11(2)k was applicable and not 11(2)l, and in that case VAT needed to be raised for all services performed from within South Africa and only those physically rendered outside South Africa could be zero rated. EOH submitted a VAT VDP to the SARS and the total VAT liability for the period August 2013 to 28 February 2021 would be settled through the sale proceeds from the buyer using an ESCROW account. Within the January 2021 half-year results, R44 million of the VAT VDP liability was recorded through the interim condensed consolidated statement of profit or loss and other comprehensive income. However, upon finalising the 2021 consolidated annual financial statements, it was determined that from the total VAT VDP liability of R74 million, R66 million was supposed to be recorded in the financial years prior to 2021 and the 2021 movement was to be R8 million, with the movement for the first half of 2021 being R5 million. Accordingly, R39 million (R18 million in penalties and R21 million in interest) of the R44 million that was recorded in the first half of 2021 has now been reversed. |
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| 6.2 | Fair value adjustments on treasury shares not eliminated on consolidation | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
A subsidiary within the Group, as well as the EOH Share Trust and EOH Mthombo Trust, previously acquired EOH Holdings' shares. Such shares were remeasured to fair value within these entities, with the fair value gains or losses being recognised within other reserves in equity. The fair value adjustments that had occurred prior to the 2019 financial year were not reversed on consolidation. This resulted in an overstatement of the other reserves, an overstatement of the stated capital and an overstatement of accumulated loss with no impact on total equity. |
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| 6.3 | Expired VFA balance within other reserves | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Prior to the 2019 financial year, a subsidiary within the Group had made an acquisition of a business through which a portion of the consideration was contingent, based on profit warranties. The liability for the contingent consideration was recognised. Subsequently, prior to the 2019 financial year, the subsidiary no longer had the obligation for the contingent consideration due to expiry and the liability was derecognised, with the other side of the entry being in other reserves. The derecognition of the liability should have been recognised in the income statement and ultimately to accumulated loss rather than directly to other reserves. This resulted in an overstatement of the other reserves and an overstatement of accumulated loss, with no impact on total equity. The errors have been corrected by restating each of the affected financial statement line items for the prior periods as follows: Interim condensed consolidated statement of profit or loss and other comprehensive income (extract) for the six months ended 31 January 2021
From continuing and discontinued operations
|
7. REVENUE
Disaggregated revenue
| Figures in Rand thousand | Unaudited for the six months to 31 January 2022 |
Unaudited restated* for the six months to 31 January 2021 |
|
|---|---|---|---|
| Revenue by sector | |||
| Public sector (%) | 18 | 20 | |
| Private sector (%) | 82 | 80 | |
| Total (%) | 100 | 100 | |
| Major revenue types | |||
| Hardware sales | 322 598 | 384 828 | |
| Services | 2 872 917 | 3 655 788 | |
| Software/licence contracts | 278 476 | 327 306 | |
| Rentals** | 37 484 | 7 956 | |
| Total | 3 511 475 | 4 375 878 | |
| Timing of revenue recognition | |||
| Goods or services transferred to customers: | |||
| – at a point in time | 601 074 | 542 517 | |
| – over time | 2 910 401 | 3 833 361 | |
| Total | 3 511 475 | 4 375 878 | |
| Continuing operations | 2 979 854 | 3 515 901 | |
| Discontinued operations (note 10) | 531 621 | 859 977 | |
| Total | 3 511 475 | 4 375 878 | |
| * | Comparative figures previously reported have been amended to reflect continuing operations prevailing for the six months ended 31 January 2022. |
| ** | Rentals recognised are excluded from revenue from contracts with customers and accounted for under IFRS 16 Leases. |
8. HEADLINE EARNINGS/(LOSS) PER SHARE
| Figures in Rand thousand | Unaudited for the six months to 31 January 2022 | Unaudited restated*# for the six months to 31 January 2021 | |
|---|---|---|---|
| Headline earnings/(loss) per share and diluted headline earnings/(loss) per share | |||
| Headline earnings/(loss) from continuing operations (R'000) | 39 055 | (112 400) | |
| Weighted average number of shares in issue ('000) | 168 754 | 168 762 | |
| Diluted weighted average number of shares in issue ('000) | 176 344 | 168 762 | |
| Headline earnings/(loss) per share from continuing operations (cents) | 23 | (67) | |
| Diluted headline earnings/(loss) per share from continuing operations (cents) | 22 | (67) | |
| Headline earnings/(loss) from continuing and discontinued operations (R'000) | 68 753 | (61 395) | |
| Weighted average number of shares in issue ('000) | 168 754 | 168 762 | |
| Diluted weighted average number of shares in issue ('000) | 176 344 | 168 762 | |
| Headline earnings/(loss) per share from continuing and discontinued operations (cents) | 41 | (36) | |
| Diluted headline earnings/(loss) per share from continuing and discontinued operations (cents) | 39 | (36) | |
| Reconciliation between earnings, headline earnings and diluted headline earnings from continuing and discontinued operations | |||
| Profit/(loss) attributable to owners of EOH Holdings Limited | 21 139 | (140 690) | |
| Adjusted for: | |||
| Loss on disposal of property, plant and equipment | 3 308 | 2 950 | |
| Loss on sale of subsidiaries and equity-accounted investments | 2 652 | 5 024 | |
| IAS 36 Impairment of goodwill | – | 61 387 | |
| IAS 36 Impairment of intangible assets and property, plant and equipment | 619 | 1 058 | |
| IFRS 5 Remeasurement to fair value less costs to sell | 41 948 | 9 833 | |
| Total tax effects on adjustments | (914) | (957) | |
| Total non-controlling interest effects on adjustments | 1 | – | |
| Headline earnings/(loss) from continuing and discontinued operations | 68 753 | (61 395) | |
| Reconciliation between earnings, headline earnings and diluted headline earnings from continuing operations | |||
| Profit/(loss) attributable to owners of EOH Holdings Limited | 21 139 | (140 690) | |
| Adjusted for discontinued operations (note 10) | 17 780 | (28 346) | |
| Continuing profit/(loss) attributable to ordinary shareholders | 38 919 | (169 036) | |
| Continuing operations adjustments: | |||
| Loss on disposal of property, plant and equipment | 3 309 | 2 430 | |
| Profit on sale of subsidiaries and equity-accounted investments | (2 897) | (17 231) | |
| IAS 36 Impairment of intangible assets and property, plant and equipment | 646 | 1 058 | |
| IAS 36 Impairment of goodwill | – | 61 387 | |
| IFRS 5 Remeasurement to fair value less costs to sell | – | 9 833 | |
| Total tax effect on adjustments | (922) | (841) | |
| Headline earnings/(loss) from continuing operations | 39 055 | (112 400) |
| * | Comparative figures previously reported have been amended to reflect continuing operations prevailing for the six months ended 31 January 2022 |
| # | Refer to note 6 – Restatement of interim condensed consolidated financial statements. |
9. NET FINANCIAL ASSET IMPAIRMENT REVERSALS/(LOSSES)
| Figures in Rand thousand | Unaudited for the six months to 31 January 2022 |
Unaudited restated* for the six months to 31 January 2021 |
|
|---|---|---|---|
| Impairment reversal/(loss) on trade and other receivables | 7 350 | (34 205) | |
| Impairment reversal/(loss) on other financial assets | 69 | (45 963) | |
| Impairment loss on contract assets | (1 562) | – | |
| Impairment loss on finance lease receivables | (1 700) | – | |
| 4 157 | (80 168) |
| * | Comparative figures previously reported have been amended to reflect continuing operations prevailing for the six months ended 31 January 2022. |
10. DISCONTINUED OPERATIONS
Identification and classification of discontinued operations
There were a number of businesses that were approved for sale at 31 January 2022, and for which the sale is expected to be completed within 12 months from the reporting date, as well as businesses that were already sold during the current and previous reporting periods that have met the requirements to be presented as discontinued operations and have accordingly been presented as such.
Judgement was applied in determining whether a component is a discontinued operation by assessing whether it represents a separate major line of business or geographical area of operations or is part of a single plan to dispose of a separate major line of business or geographical area of operations.
The Group's intention to dispose of these non-core assets triggered an initial impairment assessment on the underlying assets at 31 July 2020, and these continue to be measured at fair value less costs to sell at 31 January 2022. The resulting impairment has been allocated to the identified disposal groups. Refer to note 14.
| Figures in Rand thousand | Unaudited for the six months to 31 January 2022 |
Unaudited restated*# for the six months to 31 January 2021 |
|
|---|---|---|---|
| Revenue | 531 621 | 859 977 | |
| Cost of sales | (344 083) | (570 947) | |
| Gross profit | 187 538 | 289 030 | |
| Net financial asset impairment losses | (1 722) | (9 270) | |
| Remeasurement to fair value less costs to sell | (41 948) | – | |
| Loss on disposal | (5 549) | (22 255) | |
| Other operating expenses | (133 583) | (193 629) | |
| Operating profit | 4 736 | 63 876 | |
| Investment income | 748 | 2 129 | |
| Finance costs | (3 510) | (4 299) | |
| Profit before taxation | 1 974 | 61 706 | |
| Taxation | (19 653) | (32 540) | |
| (Loss)/profit for the period from discontinued operations | (17 679) | 29 166 | |
| Attributable to: | |||
| Owners of EOH Holdings Limited | (17 780) | 28 346 | |
| Non-controlling interests | 101 | 820 | |
| (Loss)/earnings per share (cents) | |||
| (Loss)/earnings per share from discontinued operations | (10) | 17 | |
| Diluted (loss)/earnings per share from discontinued operations | (10) | 17 | |
| Net cash flows in relation to discontinued operations: | |||
| Net decrease in cash and cash equivalents** | (23 760) | (261 375) | |
| Operating activities | 25 010 | 30 096 | |
| Investing activities | (36 945) | (276 624) | |
| Financing activities | (11 825) | (14 847) |
| * | Comparative figures previously reported have been amended to reflect continuing operations prevailing for the six months ended 31 January 2022. |
| ** | Comparative amounts have been disaggregated to show the cash flows related to discontinued operations from operating, investing and financing activities. |
| # | Refer to note 6 – Restatement of interim condensed consolidated financial statements. |
Profit before taxation before including the loss on disposal and remeasurement to fair value less costs to sell was R49 million (2021: R84 million).
The profit after tax for the InfoSys companies was R22.821 million (2021: R26.291 million).
11. PROPERTY, PLANT, EQUIPMENT, RIGHT-OF-USE ASSETS AND INTANGIBLE ASSETS
The Group acquired property, plant, equipment and right-of-use assets at a value of R31 million (year ended 31 July 2021: R67 million) and intangible assets at a value of R27 million (year ended 31 July 2021: R79 million). The Group disposed of property, plant and equipment with a carrying value of R8.6 million (year ended 31 July 2021: R56 million) and intangible assets with a carrying value of R0.4 million (year ended 31 July 2021: R18 million).
An impairment charge of R0.2 million and R0.4 million (year ended 31 July 2021: R21 million and Rnil million) against property, plant, equipment and right-of-use assets and intangible assets respectively has been recognised during the period.
12. GOODWILL
| Figures in Rand thousand | Unaudited at 31 January 2022 |
Audited at 31 July 2021 |
|
|---|---|---|---|
| Cost | 3 101 392 | 3 225 516 | |
| Accumulated impairments | (1 885 984) | (1 704 698) | |
| Opening balance | 1 215 408 | 1 520 818 | |
| Foreign currency translation | 2 520 | (6 688) | |
| Disposals | (57 329) | (117 436) | |
| Impairments: discontinued operations | (41 948) | (36 374) | |
| Impairments: continuing operations | – | (144 912) | |
| Closing balance before assets held for sale | 1 118 651 | 1 215 408 | |
| Cost | 3 046 583 | 3 101 392 | |
| Accumulated impairments | (1 927 932) | (1 885 984) | |
| Assets held for sale | (426 058) | (469 564) | |
| Closing balance | 692 593 | 745 844 |
Impairment of goodwill
During the six months ended 31 January 2022, the Group performed a review of goodwill impairments in certain cash-generating units ("CGUs"). Where impairment indicators were identified, the carrying amounts of the CGUs were compared to their respective recoverable amounts. These recoverable amounts were determined through value-in-use calculations, discounting estimated future cash flows using a pre-tax discount rate. Impairment tests on assets held for sale were based on their fair value less costs of disposal.
IP
An impairment of goodwill amounting to R42 million was attributable to the Sybrin group as a result of its writedown to fair value less costs of disposal. The main driver for the Sybrin impairment was an estimation of a downward price adjustment due to the expectation that Sybrin's performance will fall short of the EBITDA targets as outlined in the Sybrin contingent pricing mechanism, as well as Sybrin's build-up of net asset value since the 2021 financial year end.
13. INVENTORIES
| Figures in Rand thousand | Unaudited at 31 January 2022 |
Audited at 31 July 2021 |
|
|---|---|---|---|
| Finished goods | 92 671 | 95 853 | |
| Consumables | 15 633 | 5 289 | |
| Work in progress | 36 876 | 34 432 | |
| 145 180 | 135 574 | ||
| Provision for write-down of inventories to net realisable value | (20 095) | (23 026) | |
| 125 085 | 112 548 | ||
| Cost of goods sold during the period from continuing operations amounted to:* | 488 473 | 917 454 |
| * | Comparative amount has been restated to disclose only cost of goods sold during the period from continuing operations representing inventories of the Group. This has not had an impact on equity nor on the statement of financial position of the Group. |
Reversal of write-down of inventories of R1 million (year ended 31 July 2021: write-down of R7 million) to net realisable value were recognised (or were offset) against expenses during the period and included in costs of sales in the statement of profit or loss and other comprehensive income.
14. ASSETS HELD FOR SALE
The Group continued to explore opportunities for the sale of certain non-core assets, of which a few have been sold during the current financial period.
The Sybrin and InfoSys companies were classified as held for sale and discontinued operations in the 2021 financial year. At the reporting date, the Sybrin and InfoSys groups of companies continue to be held for sale subject to the fulfilment or waiver of a few suspensive conditions. The sale of both groups of companies are expected to be concluded before the end of the 2022 financial year. Refer to note 22 for further developments on these disposals subsequent to the reporting date.
There continues to be a number of businesses approved for sale and for which the sale is expected to be completed within 12 months from the reporting date. These businesses are classified as disposal groups held for sale and the assets and liabilities of these disposal groups have been presented as held for sale. Unforeseen delays, mostly due to compliance with suspensive conditions, outside the control of management have prevented the sale of certain businesses within 12 months from the prior year reporting date. These continue to be held for sale as both management and the prospective purchasers are committed to the sale transactions.
The major classes of assets and liabilities of the disposal groups, per reportable segment, classified as held for sale are as follows:
| Figures in Rand thousand | iOCO | NEXTEC | IP# | Unaudited at 31 January 2022 |
|
|---|---|---|---|---|---|
| Assets | |||||
| Property, plant, equipment and right-of-use assets | 42 691 | 3 111 | 50 774 | 96 576 | |
| Goodwill and intangible assets | 32 402 | 35 926 | 691 620 | 759 948 | |
| Equity-accounted investments | 5 979 | – | – | 5 979 | |
| Other financial assets | – | – | 69 | 69 | |
| Deferred taxation | 10 | 5 248 | 6 503 | 11 761 | |
| Finance lease receivables | 143 | – | 7 | 150 | |
| Inventories | 10 446 | – | 1 601 | 12 047 | |
| Current taxation receivable | 882 | 134 | 301 | 1 317 | |
| Trade and other receivables | 78 458 | 2 531 | 191 461 | 272 450 | |
| Cash and cash equivalents | 19 902 | 46 922 | 49 265 | 116 089 | |
| Assets held for sale | 190 913 | 93 872 | 991 601 | 1 276 386 | |
| Liabilities | |||||
| Other financial liabilities | (1 520) | (1 102) | (3 861) | (6 483) | |
| Lease liabilities | – | – | (12 934) | (12 934) | |
| Deferred taxation | – | – | (35 731) | (35 731) | |
| Current taxation payable | – | (1 968) | (2 682) | (4 650) | |
| Trade and other payables | (77 485) | (42 776) | (158 604) | (278 865) | |
| Provisions | – | – | (59 343) | (59 343) | |
| Liabilities directly associated with assets held for sale | (79 005) | (45 846) | (273 155) | (398 006) | |
| Net assets directly associated with the disposal groups | 111 908 | 48 026 | 718 446 | 878 380 | |
| Cumulative amounts recognised in other comprehensive income | |||||
| Foreign currency translation reserve | 4 411 | – | 5 732 | 10 143 | |
| Impairment loss for write-down to fair value less costs to sell | |||||
| Continuing operations - operating expenses | – | – | – | – | |
| Discontinued operations (note 10) | – | – | 41 948 | 41 948 | |
| – | – | 41 948 | 41 948 |
| # | The net assets of the Sybrin companies is R310.387 million (Assets of R534.397 million and liabilities of R224.010 million) and the net assets of the InfoSys companies is R 408.059 million (Assets of R457.204 million and liabilities of R49.145 million). |
| Figures in Rand thousand | iOCO | NEXTEC | IP | Audited at 31 July 2021 |
|
| Assets | |||||
| Property, plant, equipment and right-of-use assets | – | 2 744 | 54 244 | 56 988 | |
| Goodwill and intangible assets | – | 31 968 | 756 179 | 788 147 | |
| Equity–accounted investments | 5 979 | – | – | 5 979 | |
| Other financial assets | – | – | 60 | 60 | |
| Deferred taxation | – | 2 202 | 8 968 | 11 170 | |
| Inventories | – | – | 3 197 | 3 197 | |
| Current taxation receivable | – | – | 2 822 | 2 822 | |
| Trade and other receivables | – | – | 161 703 | 161 703 | |
| Cash and cash equivalents | – | 27 872 | 60 572 | 88 444 | |
| Assets held for sale | 5 979 | 64 786 | 1 047 745 | 1 118 510 | |
| Liabilities | |||||
| Other financial liabilities | – | (328) | (5 121) | (5 449) | |
| Lease liabilities | – | – | (17 008) | (17 008) | |
| Deferred taxation | – | – | (32 441) | (32 441) | |
| Current taxation payable | – | (857) | (4 842) | (5 699) | |
| Trade and other payables | – | (27 313) | (119 893) | (147 206) | |
| Provisions | – | – | (78 308) | (78 308) | |
| Liabilities directly associated with assets held for sale | – | (28 498) | (257 613) | (286 111) | |
| Net assets directly associated with the disposal groups | 5 979 | 36 288 | 790 132 | 832 399 | |
| Cumulative amounts recognised in other comprehensive income | |||||
| Foreign currency translation reserve | (8 290) | – | (65 884) | (74 174) | |
| Impairment loss for write-down to fair value less costs to sell | |||||
| Continuing operations - operating expenses | (1 280) | (8 553) | – | (9 833) | |
| Discontinued operations | – | – | (36 374) | (36 374) | |
| (1 280) | (8 553) | (36 374) | (46 207) |
15. DISPOSAL OF SUBSIDIARIES AND EQUITY-ACCOUNTED INVESTMENTS
On 11 December 2018, the Group announced that opportunities would be explored for the sale of certain non-core assets to assist with its plan to deleverage and remove unnecessary complexity within the Group. In line with this strategy, the Group has disposed of certain investments in subsidiaries and an associate during the period.
| Figures in Rand thousand | Treatment before disposal |
Percentage holding disposed |
Date of disposal |
Consideration received or receivable* |
(Loss)/gain on disposal |
|
| Entity disposed# | ||||||
| NEXTEC | ||||||
| Change Logic CS Proprietary Limited | Associate | 40% | 1 August 2021 | 7 527 | (935) | |
| Energy Solutions & Analytics ("ESA") | Subsidiary | 100% | 1 August 2021 | 29 178 | 3 657 | |
| IP | ||||||
| Afiswitch Proprietary Limited | Subsidiary | 100% | 1 October 2021 | 43 530 | (4 808) | |
| Transaction costs | (566) | |||||
| Net loss on disposal of subsidiaries and equity-accounted investments | 80 235 | (2 652) | ||||
| * | Consideration reflected does not include extinguishment of debt on sale. |
| # | Energy Solutions & Analytics and Change Logic CS Proprietary Limited are shown within continuing operations of the Group while Afiswitch Proprietary Limited is included within discontinued operations in note 10. |
Effective 1 October 2021, the Group concluded the sale of 100% of the issued ordinary shares of Afiswitch Proprietary Limited for a consideration of R54 million. As part of the sale, R10 million of the consideration is contingent on either the buyers securing a renewal of Afiswitch's existing SAPS contract for a minimum period of 24 months or receiving the award of the SAPS tender within the next 24 months from the effective date of sale. The performance of this obligation is outside the influence of EOH. This deferred consideration has not been included in the determination of the loss on disposal of Afiswitch above.
Reconciliation of cash received from disposal of businesses
| Figures in Rand thousand | Unaudited at 31 January 2022 |
Audited at 31 July 2021 |
|
|---|---|---|---|
| Opening balance | 17 660 | 82 052 | |
| Cash consideration received or receivable | 80 235 | 363 336 | |
| Write-off of consideration receivable | (1 000) | – | |
| Less: Amount outstanding at period end | (21 474) | (17 660) | |
| Cash received from disposal of businesses | 75 421 | 427 728 | |
| Less: Bank overdraft/(cash balances) disposed of | 2 447 | (214 792) | |
| Cash receipt from disposal of businesses, net of cash given up | 77 868 | 212 936 | |
The carrying amount of major classes of assets and liabilities, associated with subsidiaries and equity-accounted investments disposed of during the current period, are as follows:
| Figures in Rand thousand | Notes | Unaudited at 31 January 2022 |
Audited at 31 July 2021 |
|
|---|---|---|---|---|
| Assets | ||||
| Property, plant, equipment and right-of-use assets | 2 853 | 181 670 | ||
| Goodwill and intangible assets | 64 124 | 174 290 | ||
| Equity-accounted investments | 8 461 | 4 000 | ||
| Other financial assets | 4 433 | 19 352 | ||
| Deferred taxation | – | 17 637 | ||
| Inventories | 1 013 | 26 737 | ||
| Current taxation receivable | 1 395 | – | ||
| Trade and other receivables | 24 060 | 365 910 | ||
| Cash and cash equivalents | – | 214 792 | ||
| Liabilities | ||||
| Other financial liabilities | 17 | – | (64 962) | |
| Bank overdraft | (2 447) | – | ||
| Lease liabilities | (204) | (52 028) | ||
| Deferred taxation | (382) | – | ||
| Current taxation payable | (3 756) | (481 076) | ||
| Trade and other payables | (17 317) | (22 171) |
16. STATED CAPITAL
| Figures in Rand thousand | Unaudited at 31 January 2022 |
Audited at 31 July 2021 |
|
|---|---|---|---|
| Stated capital | |||
| Opening balance | 4 217 285 | 4 217 285 | |
| 4 217 285 | 4 217 285 | ||
| Authorised | |||
| 500 000 000 ordinary shares of no par value | |||
| 40 000 000 EOH A shares of no par value |
| Figures in Rand thousand | Unaudited at 31 January 2022 |
Audited at 31 July 2021 |
|
|---|---|---|---|
| Issued | |||
| Reconciliation of the number of shares in issue | |||
| Opening balance | 176 545 | 176 545 | |
| Shares in issue at the end of the period | 176 545 | 176 545 | |
| Less: | |||
| Treasury shares held in the Group share incentive schemes | (2 341) | (2 341) | |
| Treasury shares held by wholly owned subsidiaries of the Company | (5 446) | (5 446) | |
| 168 758 | 168 758 | ||
| EOH A shares of no par value | |||
| Reconciliation of the number of shares in issue | |||
| Opening balance* | 40 000 | 40 000 | |
| Closing balance | 40 000 | 40 000 |
| * | The Lebashe transaction was approved by shareholders on 18 September 2018 and effectively implemented on 1 October 2018. Since the date of approval Lebashe has:
|
The A shares rank equal to an EOH ordinary share in respect of voting rights and each EOH A share will receive cash dividends in an amount equal to the value of 15% of dividends paid by EOH to ordinary shareholders. The remaining 85% of the dividend value will be accrued and redeemed through the redemption of the A shares. Despite the variability in the number of EOH ordinary shares that will be issued, the obligation to Lebashe is treated as an equity transaction as the settlement will be undertaken in ordinary shares and the transaction is therefore within the scope of IFRS 2.
Unissued
323 455 039 (year ended 31 July 2021: 323 455 039) unissued ordinary shares.
17. OTHER FINANCIAL LIABILITIES
| Figures in Rand thousand | Unaudited at 31 January 2022 |
Audited at 31 July 2021 |
|
|---|---|---|---|
| Interest-bearing liabilities | 2 186 817 | 2 568 834 | |
| Interest-bearing bank loans secured through security SPV | 2 062 398 | 2 061 321 | |
| Bank overdrafts drawn down | – | 387 665 | |
| Project finance loan* | 120 145 | 114 902 | |
| Unsecured interest-bearing bank loans | 4 274 | 3 185 | |
| Interest-bearing bank loans secured by fixed property | – | 1 761 | |
| Non-interest-bearing liabilities | 188 | 4 138 | |
| Vendors for acquisition | 188 | 4 138 | |
| Liabilities directly associated with assets held for sale (note 14) | (6 483) | (5 449) | |
| 2 180 522 | 2 567 523 | ||
| Non-current financial liabilities | – | – | |
| Current financial liabilities | 2 180 522 | 2 567 523 | |
| 2 180 522 | 2 567 523 | ||
| Reconciliation of other financial liabilities | |||
| Balance at the beginning of the period | 2 572 972 | 2 783 218 | |
| Bank overdrafts (repaid)/drawn down | (387 665) | 272 412 | |
| Proceeds from other financial liabilities | – | 52 387 | |
| Repayment of other financial liabilities | – | (512 864) | |
| Repayment of vendors for acquisitions | (3 950) | (14 494) | |
| Disposal of subsidiaries (note 15) | – | (64 962) | |
| Net changes in fair value of vendors for acquisition | – | 10 864 | |
| Interest accrued on other financial liabilities | 86 860 | 179 540 | |
| Interest repaid on other financial liabilities | (80 540) | (191 533) | |
| Movement in capitalised debt restructuring fee | – | 51 028 | |
| Other non-cash items | (672) | 7 376 | |
| Closing balance before liabilities directly associated with assets held for sale | 2 187 005 | 2 572 972 | |
| Liabilities directly associated with assets held for sale (note 14) | (6 483) | (5 449) | |
| 2 180 522 | 2 567 523 | ||
| Financial instruments | |||
| Measured at amortised cost | 2 180 334 | 2 563 385 | |
| Financial liabilities carried at fair value through profit or loss | 188 | 4 138 | |
| 2 180 522 | 2 567 523 | ||
| Vendors for acquisition | |||
| Current financial liabilities | 188 | 4 138 | |
| 188 | 4 138 |
| * | Ring-fenced debt |
Interest-bearing bank loans are secured through a Security SPV which require that all the South African wholly owned subsidiaries of the Group provide a pledge and cession of:
- all shares in, and claims on loan account against, any member of the Group incorporated in South Africa;
- cash;
- cash equivalents;
- bank accounts;
- investments;
- claims;
- disposal proceeds;
- any other amounts, of any nature whatsoever, now or from time to time in the future owing to that obligor by any third person arising out of any cause of action whatsoever, including, without limitation, all amounts owing or becoming payable to that obligor by any of its debtors; and
- related rights.
South African wholly owned subsidiaries contributing more than 80% of the Group's adjusted EBITDA is pledged as required above and the process of providing the security is ongoing.
The interest-bearing bank loans secured through Security SPV comprises:
- an amortising facility at an interest rate of three-month Johannesburg Interbank Average Rate ("JIBAR") + 265 basis points;
- revolving credit facility at an interest rate of three-month JIBAR + 220 basis points;
- a bullet facility at an interest rate of three-month JIBAR + 285 basis points; and
- a dematerialised note at an interest rate of three-month JIBAR + 240 basis points.
18. FINANCIAL ASSETS AND FINANCIAL LIABILITIES
The following table shows the carrying amounts and fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy at 31 January 2022:
| Carrying amount | ||||||
|---|---|---|---|---|---|---|
| Figures in Rand thousand | Mandatorily at FVTPL | Amortised cost | Total | Held for sale | Balance | |
| Financial assets | ||||||
| Cash and cash equivalents | – | 540 065 | 540 065 | (116 090) | 423 975 | |
| Trade and other receivables | – | 1 241 207 | 1 241 207 | (213 009) | 1 028 198 | |
| Finance lease receivables | – | 97 086 | 97 086 | (150) | 96 936 | |
| Other financial assets | – | 89 312 | 89 312 | (69) | 89 243 | |
| Financial liabilities | ||||||
| Trade and other payables | – | 384 809 | 384 809 | (90 265) | 294 544 | |
| Lease liabilities | – | 384 809 | 132 116 | (12 934) | 119 182 | |
| Other financial liabilities | 188 | 2 186 817 | 2 187 005 | (6 483) | 2 180 522 | |
| Fair value | |||||
|---|---|---|---|---|---|
| Figures in Rand thousand | Level 1 | Level 2 | Level 3 | Total | |
| Financial assets | |||||
| Cash and cash equivalents | – | – | – | – | |
| Trade and other receivables | – | – | – | – | |
| Finance lease receivables | – | – | – | – | |
| Other financial assets | – | – | – | – | |
| Financial liabilities | |||||
| Trade and other payables | – | – | – | – | |
| Lease liabilities | – | – | – | – | |
| Other financial liabilities | – | – | 188 | 188 | |
The following table shows the carrying amounts and fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy at 31 July 2021:
| Carrying amount | ||||||
| Figures in Rand thousand | Mandatorily at FVTPL |
Amortised cost |
Total | Held for sale |
Balance | |
| Financial assets | ||||||
| Cash and cash equivalents | – | 913 346 | 913 346 | (88 444) | 824 902 | |
| Trade and other receivables | – | 1 382 196 | 1 382 196 | (130 416) | 1 251 780 | |
| Finance lease receivables | – | 109 329 | 109 329 | – | 109 329 | |
| Other financial assets | – | 11 118 | 11 118 | (60) | 11 058 | |
| Financial liabilities | ||||||
| Trade and other payables | – | 412 169 | 412 169 | (33 456) | 378 713 | |
| Lease liabilities | – | 180 318 | 180 318 | (17 008) | 163 310 | |
| Other financial liabilities | 4 138 | 2 568 834 | 2 572 972 | (5 449) | 2 567 523 | |
| Fair value | |||||
| Figures in Rand thousand | Level 1 | Level 2 | Level 3 | Total | |
| Financial assets | |||||
| Cash and cash equivalents | – | – | – | – | |
| Trade and other receivables | – | – | – | – | |
| Finance lease receivables | – | – | – | – | |
| Other financial assets | – | – | – | – | |
| Financial liabilities | |||||
| Trade and other payables | – | – | – | – | |
| Lease liabilities | – | – | – | – | |
| Other financial liabilities | – | – | 4 138 | 4 138 | |
The Group does not have any financial instruments that are subject to offsetting.
All cash and cash equivalents, short-term receivables and short-term payables carrying amounts approximate their fair values due to their short-term nature.
Other financial liabilities carrying amounts approximate their fair values due to the nature and contractual terms of the instruments.
There have been no transfers between levels of the fair value hierarchy.
Financial liabilities at fair value through profit or loss
Financial liabilities measured at fair value through profit or loss, in terms of the hierarchy, are classified as level 3 as the valuation techniques used are based on unobservable inputs for the liability.
Vendors for acquisition
The balance in respect of vendors for acquisition relates to the contingent consideration where business combinations are subject to profit warranties. The profit warranties allow for a defined adjusted value to the consideration payable in the event that the warranted profit after tax is not achieved, or in the event that it is exceeded, an agreed sharing in the surplus. The fair value of the contingent arrangement is initially estimated by applying the income approach, assuming that the relevant profit warrant will be achieved. Subsequent measurement uses the income approach to calculate the present value of the expected settlement payment using the latest approved budgeted results and reasonable growth rates for the remainder of the relevant warranty periods taking into account any specific circumstances.
Profit warrant periods normally extend over a 24-month period.
Upwardly revised performance expectations would result in an increase in the related liability, limited to the terms of the applicable purchase agreement.
Fair values have been determined using discounted cash flows. Unobservable inputs include budgeted results based on margins, discount rates and revenue growth rates historically achieved by the various segments. The applicable discount rate is 7% (year ended 31 July 2021: 7%), discounting cash flows over a two-year period. Changing such inputs to reflect reasonably possible alternative assumptions does not significantly change the fair value of the vendors for acquisition liability.
The EOH Group has an established control framework with respect to the measurement of fair values. This includes a valuation team that reports directly to the Group CFO who oversees all significant fair value measurements.
Vendors for acquisition reconciliation
| Figures in Rand thousand | Unaudited at 31 January 2022 |
Audited at 31 July 2021 |
|
|---|---|---|---|
| Balance at the beginning of the period | 4 138 | 44 043 | |
| Disposals | – | (36 275) | |
| Paid to vendors | (3 950) | (14 494) | |
| Net changes in fair value | – | 10 864 | |
| Balance at the end of the period | 188 | 4 138 |
Non-recurring fair value measurements
Disposal groups classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell. The fair values are determined based on sales agreements that are in place for each of the disposal groups that are held for sale. The total of such fair values is R954 million (year ended 31 July 2021: R834 million). These fair values are categorised as level 3, based on inputs used.
19. CASH GENERATED FROM OPERATIONS
| Figures in Rand thousand | Unaudited for the six months to 31 January 2022 |
Unaudited restated* for the six months to 31 January 2021 |
||
|---|---|---|---|---|
| Profit/(loss) before taxation from: | 71 677 | (55 978) | ||
| Continuing operations | 69 703 | (117 684) | ||
| Discontinued operations | 1 974 | 61 706 | ||
| Adjustments for: | ||||
| Depreciation and amortisation | 114 699 | 155 226 | ||
| Impairment of assets | 42 567 | 72 278 | ||
| Loss on disposal of subsidiaries, equity-accounted investments and property, plant and equipment | 5 960 | 7 974 | ||
| Changes in fair value of vendors for acquisition | – | 10 864 | ||
| Share of equity-accounted profits | – | (1 552) | ||
| Share-based payments expense | 9 139 | 23 930 | ||
| Net finance costs | 95 445 | 155 369 | ||
| Net financial asset impairment (reversals)/losses | (2 435) | 89 438 | ||
| Inventory write-off (reversal)/impairment | (1 137) | 2 120 | ||
| Write-off of historical trade balances | (13 127) | – | ||
| Provisions | (6 930) | (241 873) | ||
| Foreign exchange gains | (4 199) | (4 477) | ||
| Other non-cash items | 8 582 | 3 238 | ||
| Cash generated before changes in working capital | 320 241 | 216 557 | ||
| Working capital changes net of effects of disposal of subsidiaries | (62 630) | (190 604) | ||
| Increase in inventories | (21 263) | (12 205) | ||
| Decrease/(increase) in trade and other receivables | 11 703 | (66 618) | ||
| Decrease in trade and other payables | (53 070) | (111 781) | ||
| Cash generated from operations | 257 611 | 25 953 | ||
| * | Refer to note 6 – Restatement of interim condensed consolidated financial statements. |
20. RELATED PARTIES
| Figures in Rand thousand | Unaudited at 31 January 2022 |
Audited at 31 July 2021 |
|
|---|---|---|---|
| Transactions with associates | |||
| Sales of products and services | – | 29 | |
| Purchases of products and services | 1 603 | 2 792 | |
| Balances arising from sales/purchases of goods and services with associates | |||
| Trade receivable balances with related parties | – | 46 | |
| Trade payable balances with related parties | 1 157 | 471 | |
| Loans receivable from joint ventures | – | – | |
| – Gross loans receivable from joint ventures | 51 564 | 51 564 | |
| – Allowances for expected credit losses on loans to joint ventures | (51 564) | (51 564) | |
| Transactions between Group companies (subsidiaries) | |||
| Sale of products and services | 725 467 | 1 610 641 | |
| Purchases of products and services | 446 752 | 1 099 800 | |
| Operating expenses | 278 715 | 566 151 | |
| Outstanding loan balances | |||
| Loans from EOH Holdings Limited to subsidiaries | 2 584 847 | 2 511 277 | |
| Loans to EOH Holdings Limited from subsidiaries | 247 185 | 370 619 |
21. CONTINGENCIES AND COMMITMENTS
Parent Company Guarantees
EOH issued parent company guarantees ("PCGs") during May 2019, as required by a client for a wholly owned subsidiary, PiA Solar SA Proprietary Limited ("PiA"). The guarantees provided are for a number of years during both construction and after handover, including an operation warranty guarantee, which by nature could (in the event of underperformance by PiA) compel EOH to either ensure physical performance or settle such underperformance in cash terms. While PiA had undergone some operational challenges as a result of several factors, including COVID-19, EOH has intervened in order to minimise the potential impact of these PCGs. The projects subject to these PCGs are now substantially complete and PiA is engaging with the customer in respect of the handover of the last project. As at the reporting date, exposure in respect of certain guarantees had reduced by approximately 30%. EOH thus believes that the risk presented by the PCGs, albeit still in existence, is and will be mitigated pursuant to the handover.
Litigation
EOH and its subsidiaries are involved in various litigation matters arising in the ordinary course of business, none of which are considered material on an individual basis or in aggregate. Management has no reason to believe that the disposition of these matters will have a materially adverse effect on the consolidated financial position, financial results or cash flows of EOH.
Uncertain indirect tax exposure
The Group has an ongoing tax dispute dating back to 2012 related to a PAYE dispute in one of its staff outsourcing businesses. At 31 January 2022, the Group had provided for R267 million on the PAYE liability assessed and potential future assessments and is in ongoing discussions with SARS, regarding the potential settlement of this matter, in line with the requirements of the Tax Administration Act. Should the settlement discussions not be successful, the Group remains confident that it has a strong legal case to contest the remaining exposure, based on internal and external legal and technical advice obtained. A total of R76 million of the R267 million provision was repaid up to 31 January 2022.
ENSafrica assessment into contracts associated with suspicious activities
An assessment was undertaken in relation to contracts flagged by ENSafrica as being associated with suspicious activities, for purposes of determining the likelihood of a claim/s being raised against EOH Mthombo in relation to the contracts in question. The total contingent exposure identified in consequence of the results of that assessment is R48 million.
The assessments which resulted in a claim being regarded as likely and where a contingent liability was identified, were in relation to the following contracts:
- Amathole District Municipality ("ADM") – SAP Implementation Contracts: there are disputes raised by
ADM as to deliverables and sums payable to EOH under this contract. However, EOH maintains that it
has performed substantially on the contract.
Deloitte prepared a forensic report on the instruction of National Treasury (10 October 2019). The National Treasury issued an intervention and close-out report (27 February 2020). ADM did not accept the findings of the intervention and close-out report (27 February 2020). However, no further steps have yet been taken by ADM. In the event of a successful challenge to the validity of the contract, EOH would be entitled to just and equitable relief and would never be exposed for the full value of the contract. - USAASA – SAP Implementation: In early 2021, National Treasury investigated the procurement of the SAP implementation-services by USAASA from EOH. There is a risk that there may be a finding of impropriety in the contract. This contract came to a natural conclusion at the end of 2017, with EOH having performed and with no claims or complaints having arisen since. In the event of a successful challenge to the validity of this contract, EOH, having performed under the contract, would be entitled to motivate a just and equitable remedy. It would be unlikely and certainly contrary to the principles of just and equitable relief, that EOH would have to "refund" USAASA.
- Department of Water and Sanitation – These historic contracts are currently under investigation with the Special Investigations Unit ("SIU"), who are investigating whether there was an improper conduct in the award of the contract to EOH, and/or whether EOH had actually delivered on their contractual obligations. EOH is collaborating with the SIU on its investigation and, if any historic improper conduct has been identified or undue benefit gained by EOH, EOH will embark on a negotiation with the SIU to conclude a settlement on similar terms to that of EOH's settlement with the SUI in relation to the Department of Defence.
- Department of Home Affairs – ABIS (Biometric): At 31 March 2021 this contract had been assigned to a third party. An arbitration process relating to the delay of the project is underway in order to finalise claims from both parties' sides. XON brought an application to set aside the award of the contract to EOH and the assignment to the third party, which application has been postponed indefinitely.
22. EVENTS AFTER REPORTING DATE
Deleveraging
A detailed action plan for deleveraging the Group to a sustainable level and resolving the "fit-for-purpose" cost structure was developed by the Group and its lenders and committed to in October 2019, revised in April 2020, November 2020 and October 2021. Since its announcement in October 2019, the plan has been largely executed against and the Board reasonably believes it can continue to be implemented going forward in order to deleverage the Group and achieve its optimal capital structure.
Subsequent to 31 January 2022, the Group has repaid R360 million to lenders, largely from the proceeds relating to the disposal of Sybrin. The Group has also completed the execution of the amended and restated CTA, together with all related security and other deal documentation. All conditions precedent were met on 1 April 2022, together with the implementation of the approved group restructure as required in terms of the CTA.
The new terms of the CTA outlines the following deleveraging plan:
- A R500 million three-year bullet facility;
- R1.2 billion bridge facility repayable on 1 April 2023;
- Disposal of the InfoSys Group; and
- Optimisation of the overall capital structure of the Group.
The refinancing of the existing debt package provides the Group with greater certainty with respect to the overall debt outstanding and provides a more stable platform for the optimisation of the capital structure.
Disposal of Triclinium Clinical Development Proprietary Limited
Effective 1 February 2022, the Group closed a sale of business agreement to dispose of the business of Triclinium Clinical Development Proprietary Limited. The final purchase consideration is expected to be between R55 million and R60 million, dependent on cession of certain customer contracts over an earn-out period of 90 days from the closing date.
Disposal of Hymax Talking Solutions Proprietary Limited
Effective 1 March 2022, the Group concluded the sale of 100% of the issued ordinary shares of Hymax Talking Solutions for a consideration of R0.7 million.
Disposal of InfoSys
The Group entered into a share purchase agreement ("SPA") on 10 March 2022 to dispose of 100% of the issued shares of Hoonar Tekwurks Consulting South Africa Proprietary Limited, Managed Integrity Evaluation Proprietary Limited, Xpert Decision Systems Proprietary Limited and Zenaptix Proprietary Limited (together "Information Services" or "InfoSys"). The cash consideration payable by the purchaser to the Group on the closing date will be calculated with reference to an enterprise value of R445 million and shall be an amount equal to the base purchase price of R417 million adjusted for final net debt and working capital benchmarks, certain once-off items and locked box adjustments as at 31 July 2021 ("the Locked Box Date"). Interest will accrue on the cash consideration from the Locked Box Date up to (and including) the closing date. The transaction is subject to the fulfilment or waiver, as the case may be, of the suspensive conditions contained in the SPA, which include, inter alia, the shareholders of EOH approving the ordinary resolution as required in terms of the JSE Limited Listings Requirements to approve the transaction.
Disposal of Sybrin
Pursuant to entering a sale agreement for 100% of the issued ordinary shares of the Sybrin Group of companies, which comprise two holding companies, Sybrin Limited and Sybrin Systems Proprietary Limited and their respective subsidiaries ("Sybrin"), the transaction was closed on 31 March 2022. The cash consideration amounts to up to R334 million (R50 million of which was contingent on Sybrin's performance to EBITDA targets). R277 million was received on 31 March 2022. The final consideration is still subject to the finalisation of the completion accounts adjustments, which include adjustments for net debt and net working capital. This is expected to be finalised within 60 days of closing.
The remaining R55 million of the SARS VAT VDP liability was settled on 28 February 2022.
Disposal of Network Solutions and Hymax
On 6 April 2022, the Group concluded agreements to dispose of its Network Solutions business ("EOH-NS"), as well as Hymax (SA) Proprietary Limited ("Hymax"), both of which currently operate under the iOCO segment, for a consideration of R144.9 million. The purchase consideration will be settled as an upfront payment of R115.9 million, payable on the closing date and the remaining balance being held in an interest-bearing escrow account for a period of 12 months. The transaction is subject to the fulfilment or waiver, as the case may be, of the suspensive conditions detailed in both sale agreements, including the unconditional approval from the Competition Authorities.
The above transactions are in line with EOH's stated strategic intent of selling non-core assets as it seeks to right-size the Group and deleverage its balance sheet. The cash consideration received by EOH will primarily be utilised to reduce debt with the remainder being utilised for the working capital requirements of the Group.
Change in tax rate
During the February 2022 Budget Speech, the South African Finance Minister announced a decrease in the corporate income tax rate from 28% to 27%, which will apply to companies with years of assessment ending on or after 31 March 2023.