iOCO co-CEO Rhys Summerton. (Photograph supplied)
Listed technology company iOCO is reducing its debt over time, having substantially trimmed its bank loans before pursuing acquisitions, with three potential deals already identified.
For the first time in three years, iOCO reported strong operating cash flows with focused resource and capital allocation, while also reducing short- and long-term debt by R354 million.
Co-CEO Rhys Summerton, speaking during a call with investors yesterday following the release of the company’s full-year results to July, said the firm was looking for “acquisitions that are going to take iOCO into the future rather than protect the past”.
Noting that iOCO – as EOH – had historically been very acquisitive, Summerton said: “In tech, you have to continuously look ahead into the future, and if you don’t make acquisitions, then you’re going to get left behind.”
Summerton explained the company will continue using cash flow to reduce debt, creating opportunities for deals. He told investors there were three potential targets iOCO could acquire without risk to the business and at the right valuation.
iOCO generated R567 million in cash during the year and ended with a closing balance of R399 million, reversing its previous position of more cash going out than coming in. Its bank debt has dropped 50% over the past two years.
Summerton likened the bank debt to the relationship between a toddler and a parent helping it “get back on its feet”. As progress was made, iOCO became more like a teenager.
“Teenagers don’t want their parents anywhere near them, so that’s our attitude to the bank. We appreciate what they did for us, but the sooner we don’t have them near us, the better.”
However, Summerton said there were “two rivals” for free cash flow: acquisitions or share buybacks. Investors benefit from buybacks because fewer shares in issue make each individual share more valuable.
Investors have seen their investment drop from a peak of R105 in August 2015 to a trough of R1.36 in October 2023.
This followed an ENSafrica forensic investigation that revealed widespread governance failures and tender irregularities worth R1.2 billion in the public sector unit.
The probe, released in 2019, showed staff in EOH’s public sector units had engaged in extensive bribery, corruption and tender irregularities, largely centred in its EOH Mthombo subsidiary and occurring mainly between 2014 and 2017.
As a result, EOH reinvented itself as iOCO at the end of last year.
In its full-year results to end-July, the company said earnings per share improved to 40c from a loss of 10c in the prior year. ITWeb’s research shows the company last reported a profit in 2019, when it was still EOH and in the midst of the financial misconduct scandal.
Although revenue was down 1.2% on a continuing operations basis, Summerton anticipates this is the bottom of the decline. The revenue decline resulted from weaker public sector income, among other factors.
The company will no longer chase new contract wins to replace contracts that have fallen away. “Rather, we want to concentrate on high-quality annuity revenue going forward,” he said.
Summerton said the company wants to increase its public sector unit’s contribution to revenue, which fell from 14% to 11% and was “in the high 20s” a few years ago.
Going forward, iOCO will concentrate on wrapping up phase one of a three-stage recovery strategy, which is cost rationalisation. It will then embark on “radical autonomy,” giving business unit heads autonomy to run their units.
Assuring investors the new management team was stable, Summerton said, “if there’s an element of non-delivery, then we’ll have to change those chief executives, and we’ll be ruthless on that as well, because radical autonomy can only work if we’ve got the very best people running each business.”
The final phase will focus on resource, such as cash and allocation, which is where the potential deals would come into play.
