2018 a challenging year for Denel


Denel says it has experienced a difficult year with reputational damage and a liquidity crisis that saw the company make an operating loss of R1.7 billion, with revenue down by 38%.

In its latest annual report, Denel said for the 2017/18 financial year, revenue was down from R8 billion to R4.9 billion. This was largely due to the impact of the liquidity crisis and reputational damage suffered through association with state capture on all aspects of the business. Denel’s total debt has increased by R354 million to R10.1bn (compared to R9.8 billion in 2016/17).

“Denel’s relationship with financial institutions and the investment community, on which the company rely for facilities and bridging finance, was negatively impacted by allegations of state capture. This, together with delays in the Hoefyster and MBARC I programmes resulted in a liquidity crunch as capital invested in working capital could not be unlocked and lenders were unwilling to provide further liquidity to the Group,” Denel said. The company also suffered from delays on the AV8 programme for Malaysia.

“Because of this, Denel was unable to mobilise its supply chain and execute and deliver on work that it had. This was largely responsible for the negative results recorded in the financial year…Provision for additional costs to complete the Hoefyster development and MBARC I programmes, partly due to liquidity constraints, partly due to technical difficulties, also impacted the financial results for the year.”

Due to delays, costs to complete Project Hoefyster and MBARC I increased by R248 million and R319 million respectively. The MBARC I project has been completed and was delivered in June 2018; and a recovery plan to complete the Hoefyster development within revised cost projections during the 2018/19 financial year is underway.

MBARC I covers the delivery of Al Tariq guided bombs to the United Arab Emirates. Denel said that technical delays on both the development and production phases of the contract have led to increased costs. At the end of March 2018, the contract was estimated to be loss making. The total contract value is R1.843 billion and the estimated cost and loss is R1.893 billion and R50.1 million respectively. The contract is expected to be complete during the 2018/19 financial year.

A cause for concern for the 2017/18 financial year was an increase in irregular expenditure. The group identified and reported irregular expenditure of R200 million, compared with R116 million in the 2016/17 financial year. However during the audit, a further R313 million in irregular expenditure was identified leading to a total of R513 million in irregular expenditure disclosed. The significant increase is due to non-compliance to Public Finance Management Act (PFMA) and Treasury Regulations.

In spite of challenges, Denel believes that given the mitigating steps taken by the new board, Denel will continue operating as a going concern for the 12 month period to 31 October 2019. Turnaround measures include the selling of non-core assets, introduction of strategic partnerships, raising R2.8 billion in the investor market in September 2018 and receiving extended government guarantees for a period of five years until September 2023.

The introduction of a new board in April 2018, together with a comprehensive plan on governance turnaround have largely addressed the concerns of financial institutions and the investment community and relations are returning to normal. As a result, Denel was successful in refinancing existing debt of R2.8 billion in 2018/19, the company said. Denel expects to return to profit in the 2019/20 financial year.

Going forward, Denel has strengthened its focus on products that would best suit market penetration and produce free cash flows available for technology investment. “Whilst R&D work continues with very good results on the high technology products, other products best positioned for large volume exports were identified especially in the missiles and standoff weapons area.”

Former acting Denel CEO Mike Kgobe stated in the annual report that Denel is currently facing tough times which might continue for the next two years. “Robust and difficult actions will be required to improve our financial position,” he wrote. “We are undertaking a turnaround strategy, to ensure that Denel follows an integrated approach that addresses not only our current challenges, but also ensures that the future direction is clear. The focus is on stabilising the organisation, cleaning up governance issues, followed by a concerted strategy to re-energise and grow the business.”