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Denel facing liquidity challenges

Denel.Denel is facing liquidity challenges and is over-reliant on exports, according to Public Enterprises Minister Lynne Brown.

Speaking on 8 March in a briefing to the public enterprises committee, Brown said that “there are some challenges facing Denel which relates to liquidity and overreliance on foreign markets.” Regarding liquidity, she said that “ensuring sustainable funding solution for the business is critical, as the SOC [state owned company] has been reliant on client advance payments and short term paper to finance its working capital requirements. The strategy is not sustainable and it has exposed the business to regular cash flow shocks. A long term recapitalisation plan needs to be found to ensure liquidity and sustainability.”

The minister also criticised Denel’s reliance on foreign revenue but acknowledged that local defence spending via the Department of Defence “has been declining for a long time, leading to Denel increasingly relying on foreign business for its sustainability. 60% of Denel revenues are derived from exports. Foreign governments expect technology transfers when procuring from external suppliers.

“This results in Denel cannibalising its own long term future in order to ensure short term cash flows. State needs to guarantee Denel’s role as a prime contractor of strategic defence and security products and compelling amongst others: SANDF, SAPS, National Disaster Management Centre, and Correctional Services to protect Denel’s right of refusal on critical requirements.”

Brown said that Denel has been unable to take advantage of the Asian market because Treasury has not yet approved the establishment of Denel Asia. Finance Minister Pravin Gordhan refused to approve the new company after Denel went ahead and registered it without requisite permission. "We have not heard from Treasury," Brown is reported by Business Day as saying, in spite of repeatedly asking Treasury about the matter.

In spite of criticism, Brown praised Denel for being ranked among the world’s top 100 global defence manufacturers and being the second largest defence company in the Southern hemisphere. “The company has grown exponentially in the last few years more than doubling its revenues from R3.9 billion in 2013 to R8.2 billion in 2016. Export revenue now makes up 58% of the total revenue. Denel spends approximately R500 million per annum on Research and Development.”

“Denel remains Government Flagship on how to implement a turnaround strategy and hold important lesson for the State in how to optimise partnership with the Private sector. Over the past three years, Denel has posted profits and the trend has remained upwards. In 2015/16 financial year, the company posted a profit of R395 million.”

The company’s order book includes the Hoefyster production contract for Badger vehicles for the South African Army, the A400M work packages with Airbus, the Al-Tariq stand-off weapons contract with Tawazun Dynamics and mine resistant vehicle contracts. “Four of these mine resistant protected vehicles (the NIMR 35) were recently deployed in Yemen. There were no casualties from the altercation an indication of the fine engineering capabilities of Denel,” Brown said.
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