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Etion group restructuring, consolidating and possibly delisting

‘The underlying businesses all operate very well among themselves,’ declares acting group CEO Richard Willis.

SIMON BROWN: I’m chatting with Richard Willis. He’s Etion group acting CEO. Results out for the year ending March saw revenue up 20%, headline earnings at 0.87 cents/share. That was up 1171%. Richard, I appreciate your time today. I want to delve into numbers before I do a quick first question. The sale of LAWtrust for R245 million – is that still on track?

RICHARD WILLIS: Yes it is, Simon. There are two events that need to take place. We’ve got a shareholders’ meeting, a general meeting on July 14 for shareholders to vote in favour of the deal. And then we obviously sit and wait for Competition Commission approval for the application which went in in April. There’s generally a 45-day period in order for them to rule. They’ve asked for a slight extension because they’re dealing with some questions. We are hopeful that that will go in our favour.

SIMON BROWN: I ask because the market cap of Etion is R220 million. My question to you is, assuming it goes through, what plans for the proceeds from the sale?

RICHARD WILLIS: We are obviously thinking long and hard about it. Part of the shareholder value-creation strategy is to unlock value. As you know, these holding companies often trade at a discount to the underlying sum of the parts. Etion’s market cap went right down to R65 million about a year and a bit ago, and we knew that we needed to do something.

So the first sale, that of LAWtrust, has taken place. We are likely to tender the other two businesses for sale and then ultimately probably try and delist the group in due course. 

What are we going to do with the cash is we obviously need to pay down a term loan that we owe Nedbank – around R23/R24 million. What we’re going to be doing is there are some growth initiatives that we need to look at supporting within some of the operating entities. And then there’s obviously a healthy dividend return of contributed capital that we are busy assessing [how] to try and deal with.

SIMON BROWN: Over the past year you’ve been in a process of restructuring essentially three divisions – Etion Connect, Create and Secure. Secure is the LAWtrust part. You’ve redone the restructuring. Are you comfortable with where they all fit and sit at this point in time?

RICHARD WILLIS: Very much so. Each of these businesses, while they operate in the digitisation space, generally operate in their own markets. There was a thought train a couple of years ago to try and find an end-to-end technology solution across all businesses, but you and I know that that’s generally quite difficult to achieve. 

The underlying businesses all operate very well among themselves. We felt that the most appropriate way to unlock shareholder value is to possibly look at selling those individual businesses because, as you know, you just have to look at the market cap and the value that we achieved for LAWtrust to know there is significant value to be unlocked.

SIMON BROWN: If we look at Create – Create is design manufactured, it’s an advanced technology, it’s mining, it’s defence, it’s IoT (Internet of Things). If I look at Digitise, it’s also got some IoT in there. I’ve been chatting with the group over many, many years [since] the listing and they are kind of different in senses. Yes, they might both be IoT, but they’re in different industries and, and specialising in different spaces.

RICHARD WILLIS: Very much so. One of the restructuring events that took place is that the two businesses that were closely aligned were Digitise and Create. Largely because Create used to build and manufacture the products that Digitise used to obviously distribute and implement in their customer base, what we looked to do is consolidate Digitise into Create. We are leveraging off the fixed cost base within the Create environment. And then we’ve obviously got a distribution arm that goes and markets the Digitise product. We felt that that was more aligned to consolidating those two businesses, and at the moment it seems to be paying dividends.

SIMON BROWN: Certainly Create has a very, very chunky-looking order book – R400 million-odd sitting there because it’s manufacturing. Are there long lead times, or is it a case of you’ve done the R&D and you’re out there selling what you’ve done – the research and development – and those lead times perhaps aren’t too bad; or is it sort of fine-tuning for individual customers?

RICHARD WILLIS: A substantial portion of that committed order book is an overseas contract where the economic value will come over a three-year period, and we are looking to kick-start that contract really soon. There’ll be incremental revenue during this financial year and the following year and the year thereafter. 

But what’s quite important and what’s nice to see is the other order books in the homegrown markets that we operate, mainly defence and mining, that are ready to build. We are starting to see the mining companies awash with cash and they’re looking to invest in new technologies and new equipment which falls right into our court. 

SIMON BROWN: And that’s in order to stop two underground dump trucks colliding. You’ve also got the Connect part. You mentioned mining, a pick up there. A lot of your product would also play into the work from home. We are back in Level 4 in South Africa, but have you seen a pick up in demand or interest as we’ve moved through the pandemic and realised the new reality we face?

RICHARD WILLIS: Very much, Simon. Connect’s order book at the moment is sitting at R178 million. So we’ve seen a massive uptick. Just a quick comment on our customer base. The telcos – you go out and look to invest in that infrastructure; they tend to invest and then they run through a process of trying to connect the homes to that infrastructure. We saw this business being a great beneficiary of the investment cycle up until about 2018. And then a lot of the network operators went off the boil and were more focused on connecting the businesses and the homes to the infrastructure. And now what’s happening with the work from home is we are starting to see the investment cycle return. So that’s great for our business. It means nice healthy orders, and we’re quite well positioned.

SIMON BROWN: I hear you. They’ve kind of flipped for a while there to the last mile, and now they’re back to their networks. 

We’ll leave it there. Richard Willis is Etion group acting CEO. Richard, I appreciate the time.

Listen to Thursday’s full MoneywebNOW podcast here.

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