WHERE TO INVEST: Can iOCO deliver on turnaround promises and unlock future growth?

ICT services provider iOCO is one of the more intriguing turnaround stories on the JSE. I have a small position in the stock in my portfolio based on the free cash flow story that management is telling the market. If they can execute in line with guidance, the numbers get rather interesting.

But before we get to that, we need to give more context to iOCO’s journey in recent years.

It initially emerged as the charred remains of the tarnished EOH business. The group has been through so much just to get to a stable position. The legacy issues are now behind it, with the business focused on building for the future rather than surviving a crisis.

The market has rewarded the turnaround narrative, with a fourfold increase in the share price between 2024 and the peaks in 2026. The share price has come off the boil though, currently trading at R4.00 vs the 52-week high of R4.80.

The movement over the past two years was largely validated by the results for the 12 months to July 2026. Thanks to a 42% jump in headline earnings per share (Heps), iOCO is now trading on a price to earnings multiple of around 7x, a typical level for a mid-cap on the JSE.

As great as that jump in profits sounds, the critical nuance is that Heps wasn’t driven by high revenue growth. In fact, the group could only increase its revenue by 3% for the period, with nothing exciting to report in terms of segmental growth rates.

The gross profit line also doesn’t explain why Heps did so well. Gross margin dipped from 29% to 28%, while gross profit in rand terms was down 0.8%.

The performance in this period was thus driven by other factors that aren’t easy for the market to extrapolate, such as a 6.4% decrease in operating costs. This drove a 21% increase in adjusted core profits (Ebitda). The jump from Ebitda to Heps is explained by lower finance costs and a decrease in the tax expense despite strong growth in profits.

Credit where it is due

Although it would look a lot better if these numbers were being driven by top-line growth, credit must be given where it is due. Having no loss-making business units in FY26 is a big deal for a group that reported a hideous loss of R307-million in FY21, just five years ago.

In fact, if you view FY21 to FY26 as a whole, you’ll find an aggregate profit of just R42-million. This was nowhere near enough to deal with the net interest-bearing debt burden of over R2-billion that the company reported in FY21, hence the need for a R600-million capital raise in 2023.

Timing is everything when investing in turnaround stories, as pre-capital raise investors are still sitting in the red. Those who got involved afterwards are now smiling, with the company reporting a profit of R357-million and net interest-bearing debt of just R480-million.

Much has been done, but much still needs to be done. The next phase of the story will be less about restructuring and more about capital allocation.

If guidance is met, there should be plenty of capital to be allocated. Thanks to an expected R200-million working capital unlock, the expected free cash flow in FY27 is R650-million. Management has guided a further R500-million in FY28. That’s R1.15-billion over the next two years – a very healthy return on the current market cap.

If it materialises, then what will they do with it?

Further acquisitions are likely, with iOCO hinting at deals ranging in size from R60-million to R600-million. At the top end of that range, we are talking about risky transactions in the context of the market cap of only R2.55-billion.

Taking it back

The alternative is of course share buybacks. If the earnings multiple remains stuck in single-digit land, then the market could see it as a strong positive signal if management is willing to repurchase shares at that price instead of chasing more transactions.

The business would do well to keep in mind that South African investors are far past the stage of being enamoured with roll-up acquisition strategies that fail to deliver meaningful synergies. For the Price/Earnings multiple to move higher, management will need to demonstrate growth in the existing businesses as well.

For now, the market seems to be holding its breath. There wasn’t much of a response in the share price to the latest earnings, suggesting that the multiple has stabilised along with the business.

It’s now up to management to deliver on their promises. Achieving the guided growth of 11.5% in Ebitda for FY27 would be a very good place to start. DM