Denel’s R1.962 billion loss for the 2019/20 financial year ending March was driven by liquidity constraints, poor programme execution, and delayed sales, the state-owned company’s latest annual report said, adding that little to no production activity further hurt the defence conglomerate.
Denel published its annual report on 1 February. The Johannesburg bourse had threatened to suspend the listing of Denel’s bonds if the arms manufacturer did not publish its results by the end of January.
According to the document, Group revenue reduced by 20% to R2.72 billion in 2019/20, compared with R3.4 billion in 2018/19, driven by liquidity constraints as Denel battled with low funds to meet all its operational requirements in the year. This impacted on the payment of suppliers, therefore on-time deliveries to customers, the annual report said.
Consequently, Denel’s net loss for the year was R1.962 billion, up from a recalculated R1.469 billion in 2018/19. The operating loss of R1.5 billion was mainly driven by lower revenue-generating activities, leading to an increase in labour under-recoveries and forex losses on exports.
The net loss was further impacted by an 85% reduction in profits from associates as Rheinmetall Denel Munition posted a R227 million net loss before tax due to a reduction in revenues, and operational accidents.
As at 31 March 2020, Denel was insolvent by R2.3 billion. This was driven by the losses incurred since 2017/18. On 31 August 2019, the state approved and paid to Denel R1.8 billion in recapitalisation funds to re-stabilise the business and improve the solvency position. This funding injection was utilised to restart operations, pay overdue taxes and debt financing costs, and implement strategic actions in the turnaround plan. However, this recapitalisation was not enough to maintain revenue.
In its annual report, Denel cited a gloomy business outlook, with the global defence industry set to decline as the world economy deals with the COVID-19 pandemic; the shrinking domestic defence budget and closure of the Special Defence Account from the 2020/21 financial year.
“The South African defence markets have…been depressed for a number of years, with the last major capital expenditure projects being for patrol vessels [under Project Biro], which are also slowly coming to an end. No major exciting capex projects are on the immediate horizon,” the report points out, emphasising the fact that South African defence spend is around 1.1% of GDP – less than the norm of 2.5%.
“Denel and the SADI [South African Defence Industry] have to look increasingly outwards for growth. Denel’s position is supported by its substantial order book of circa R13 billion.”
Talib Sadik, Acting Group CEO, stated in the report that, “taking various factors into account in the evaluation of the consolidated annual financial statements, including management’s radical action plans and mitigating actions to improve Denel’s performance and solvency position during the next 24 months, the directors are satisfied that Denel will continue to operate as a going concern, while it looks forward to assistance from its Shareholder in the identification and management of risks.”
Monhla Hlahla, Chairperson of the Board, stated that, “The Board has put a great deal of effort into turning the company around, improving corporate governance and establishing a stable management team. Our Shareholder, the Department of Defence, and the Board are confident that Denel remains a strategic asset for our country and will continue to do so. Denel remains confident that all its actions will yield positive results.”
She highlighted that Denel’s turnaround strategy was gaining momentum. This includes exiting and winding up of lossmaking subsidiaries. The first of these was the exiting of Denel’s aerostructures manufacturing business, which was expected to be largely concluded by the end of July 2020, resulting in an annualised savings benefit of R260 million.
Another turnaround initiative is seeking strategic equity partners. “Denel received unsolicited offers from a number of parties during the period under review, all of which are exploratory at this stage,” she wrote in the report. “The company will follow all the relevant legislative requirements in pursuing these preliminary interests in the next financial year.”
In terms of past mismanagement, Hlahla stated that investigations are underway to identify past transactions that may be condoned and in which disciplinary action may be taken. Denel’s forensic investigations related to the contract with Chad, Denel Asia and VR Laser have been completed, reviewed by legal counsel and the recommendations are being implemented. Disciplinary hearings are ongoing, and statements related to these matters have been finalised and handed over to the South African Police Service for investigation.
Denel’s annual report noted that the State continues to view Denel as a strategic asset and has, in the past, made a written undertaking that it will endeavour to assist the directors to maintain the company’s going-concern status. It also extended the R3.34 billion guarantee from one to five years during 2018/19.
The group’s government guarantees amount to R4.4 billion. These guarantees expire on 30 September 2023.