Denel Group acting CEO Talib Sadik told a parliamentary committee today that the loss-making state-owned company can turn itself around and restore its reputation in spite of its liquidity and other challenges.
In a presentation to the Portfolio Committee on Public Enterprises on Denel’s Funding and Governance Challenges, Sadik pointed out that Denel was on a growth trajectory up until 2016/17 but then this reversed due to the decline in local defence spending and state capture, which led to “poor governance and leadership in the company. As a result, Denel’s revenue dropped significantly and the level of debt became unsustainable. During that time we also lost people and we slipped on programme management.”
“The important message is there was a growth trajectory up to 2016,” Sadik said, adding that Denel’s ambition is to grow revenue to R5 billion in the next five years and “based on the pipeline and orders that’s what we are seeing.”
“We want to restore Denel’s reputation as a reliable partner. We want to be efficient, competitive and build those relationships. We need to restore our capital structure and are looking at unlocking cash from property and non-core divisions,” Sadik said, adding that “with these initiatives and having the right support we should be able to reposition Denel and restore its reputation that it held.”
One of the initiatives to turn Denel around was the sale of loss-making LMT subsidiary LMT Products to OTT as part of its business rescue process, saving 60 jobs as well as R48 million in annualised support costs.
Sadik said that Denel has made good progress exiting LMT as well as the Aerostructures business, although the aerostructures exit came with costs in the form of penalties and retrenchments. Efforts are being made to exit or divest from Spaceteq, LMT Holdings, Hensoldt Optronics, Gear Ratio, Mechem and Denel Properties.
Division that will be retained include Denel Land Systems, Denel Vehicle Systems, Denel Aeronautics, Denel Dynamics and Pretoria Metal Pressings as these are sovereign capabilities Denel is seeking to grow.
Other successes include reducing the number of overdue creditors, and saving a cumulative R1 billion since April 2018, driven mainly by a 27% reduction in employee numbers. Aside from exiting non-core and loss-making divisions, Denel is looking to other revenue streams and is working closely with the security clusters and other state agencies as the company moves away from purely defence business, Sadik said.
Denel has been engaging with the Department of Defence (DoD) and other stakeholders at finding a sustainable funding model for strategic and sovereign capabilities as funding these critical capabilities “has weakened our balance sheet”. Consequently, Denel is asking the DoD to provide R683 million in sovereign and strategic capability funding in 2021, mostly for research and development and obsolescence management. As orders come in, Denel would need less funding: R635 million in 2021/22, dropping to R400 million in 2024/25.
Denel still faces a number of challenges and made a R1.8 billion loss in the 2019/20 financial year due to a significant decline in revenue and poor programme management as well as the impact of the coronavirus pandemic. Denel’s equity is significantly below levels (R4 billion) required by investors and its assets are predominantly funded by debt.
Other challenges include lenders unwilling to advance funding for projects, the decline of bridge funding, the inability to pay full salaries since April 2020 and liquidity constraints. Consequently, Denel has made an application for emergency funding to sort out short term liquidity and is looking to get a loan from National Treasury.
The high turnover of staff at present is a concern, Sadik said, with 296 people leaving the company between April and August, leaving 3 032 people working at Denel. The staff turnover ratio is 9.3%. This is in part due to the inability of Denel to pay full salaries between May and July, resulting in trade unions Solidarity and UASA taking Denel to court. The loss of personnel has particularly affected the missile division of Denel.
Sadik noted that Denel is confident it will be able to attract people back to the company once it has been stabilised as many people are keen to return if the company is healthy.
However, he admitted that relations with unions is strained and Denel faces a lawsuit due to be heard on 3 December 2020 and the threat of a lawsuit by the Pension Fund (Denret).
Meanwhile, the COVID-19 pandemic has caused revenue delays due to the National Conventional Arms Control Committee not issuing contracting permits on time (although most of these issues have been addressed) and disrupting employee productivity and new sales. To date, Denel has recorded 60 positive coronavirus cases, with 55 recoveries and three employees passing away.
Carmen Le Grange, Denel Group CFO, told the parliamentary committee that National Treasury has released R305 million of the R576 million cash injection allocated to the company and this has been used to service debt. Denel has asked for the remaining R271 million be used for working capital. “We remain hopeful this will be the case,” she said. Denel has average working capital requirements of around R370 million per month to ensure operations run smoothly.
She added that the Public Investment Corporation (PIC) has rolled over UIF bonds worth R2.488 billion for a further 12 months and National Treasury and the Department of Public Enterprises supported Denel paying quarterly interest.
Denel chairperson Monhla Hlahla cautioned that Denel is challenged by its debt, with quarterly interest payments “eating up monies” and taking away from working capital. “That remains a big challenge to Denel,” she said, noting that a lot of debt has been inherited from programmes that were not implemented properly.
She added that Denel needs to stop relying on advance payments to fund working capital as this means projects can’t be delivered on and the company faces penalties from past programmes.
“I believe Denel can be saved if we move fast. Denel, the shareholder, DPE, the Department of Defence need to come together. Speed is of the essence when dealing with weak and vulnerable entities like this.”