Denel’s finances remain vulnerable, but money incoming

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In March, Denel received R1.8 billion from National Treasury, which is withholding another R1.5 billion while Denel proceeds with the sale of remaining non-core assets as part of its turnaround plan.

Delivering on the turnaround plan remains a priority, and National Treasury is carefully monitoring progress on this, according to Treasury’s Asset and Liability Management Division, which on 30 May updated Parliament’s Standing Committee on Appropriations on the status of state-owned companies.

National Treasury (NT) reminded the Committee that due to Denel’s challenges it was not able to pay creditors, salaries, and taxes nor service debt and submit annual reports, resulting in Government stepping-in for guaranteed debt totalling R3.241 billion to date.

It was announced during the 2022/23 Medium-Term Budget Policy Statement (MTBPS) that Denel will be allocated R3.378 billion as part of its latest turnaround plan. This includes disposing of non-core assets, consolidating core capabilities, and achieving growth through collaboration, amongst others.

The turnaround plan has a funding requirement of R5.203 billion, of which Denel committed to raise R1.8 billion through the disposal of non-core assets. In March this year, Denel received R1.863 billion of the R3.378 billion allocated by the Government, with the remaining portion ringfenced by Denel – it can only be used once the state-owned entity realises proceeds from the sale of remaining non-core assets. “This enforces accountability on Denel to follow-through on the identified self-help initiatives to augment the recapitalisation,” National Treasury said.

The sale of the Denel Gear Ratio division has received Public Finance Management Act (PFMA) approvals and awaits the receipt of R94 million. The disposal of Denel’s share in Hensoldt is awaiting Ministerial PFMA approvals to unlock R175 million. The property disposals have received offers from potential buyers and promises to unlock R650 million for the company.

Before the March 2023 funds transfer, Denel managed to catch up on its salary payments last year by using R992 million received from the Denel Medical Benefit Trust (DMBT). Denel forecasts reduced net losses (-R267 million against a budget of -R991 million) due to the DMBT proceeds.

The additional funds helped push Denel’s equity to R2.2 billion as of 31 March 2023, and liquidity to R3.7 billion. “This is a significant improvement from the historically negative equity being reported,” National Treasury noted. However, it cautioned that “profitability was suppressed due to reduced productivity in operations, associated under-recoveries and delays in the implementation of cost reduction measures.”

“Whilst Government assistance reduced Denel’s guaranteed debt and boosted its equity, Denel remains financially vulnerable. Delivering on the turnaround plan remains priority,” National Treasury stated.

Last week the Department of Public Enterprises (DPE) said that “Denel is considered a strategic national security and industrial asset, which has led the Department to implement a series of actions to strengthen the SOE, improve its strategic focus, and ensure that it has the human resource capabilities to implement its turnaround plan.”

“The recapitalisation allows Denel to fully implement its turnaround plan to ensure support to the Department of Defence (DOD) and specifically the South African National Defence Force in order to secure our country’s strategic defence and security of supply of defence capabilities.”

The DPE noted that Denel has a ‘robust’ order book, which stands at R18.37 billion for 2023/24, while planned total sales are projected to be R2.08 billion, compared with R1.08 billion in the 2022/23 financial year.