State-owned defence conglomerate Denel reported an operating loss of R1.9 billion and net loss of R1.75 billion for the year to March 31, with revenue dropping 36% over the last financial year as the company struggles to recover from the effects of state capture.
In its annual report for the period 1 April 2018 to 31 March 2019, published on 4 October, the company said it recorded revenue of R3.8 billion (down from R5.8 billion in 2017/18) with cash of R575 million (down from R1.3 billion the year before). It noted that revenue is at an all-time low due to low operational activity, liquidity constraints and difficulty paying suppliers. Export sales declined 19% due to the conclusion of a major contract in the Middle East.
Denel’s net loss was R1.749 billion, up from R1.053 billion in 2017/18. “The decline in our reputation has also had a draining impact on our financial position,” Group Chief Executive Danie du Toit said in a statement.
The R1.9 billion operating loss “was driven by the gross loss of R614 million driven by the contract losses and reduced sales leading to cost under recoveries. The loss further includes the provision for the exit from the DAe [Denel Aeronautics] Airbus contract. As at 31 March 2019, the negotiations were at an advanced stage and as such it was probable that the exit will occur.”
In releasing its annual financial statements, Denel said the audit report contains a disclaimer of opinion, an emphasis of matter and a material uncertainty. The disclaimer of opinion is due to insufficient appropriate audit evidence to provide a basis for an audit opinion. The emphasis matter relates to various restatements that occurred in the 2017 and 2018 financial years as a result of an error. A material uncertainty exists that may cast significant doubt regarding the going concern status of Denel as the Company incurred a net loss of R1.7 billion for the year ended 31 March 2019, projected losses in 2019 to 2020 and received a R1.8 billion recapitalisation from its shareholders. “However, the auditors are satisfied that given the mitigating steps taken, Denel will continue as a going concern for the foreseeable future.”
“With the recent appointment of the Group Chief Financial Officer, the audit committee and the board are reviewing the Denel improvement plan which will be finalised and shared with the market at the end of October 2019.”
Denel said it has a substantial order book of around R18 billion. “The business focus going forward will be the implementation of the turnaround strategy in order to improve Denel’s balance sheet. This includes the sale of loss making and non-core assets; implementation of ring fencing projects and prepayments from customers; strengthening the balance sheet through cash injections from the shareholder to reduce reliance on debt and improve solvency; continued cost containment measures to reduce the fixed costs over time; and adopting stringent working capital measures to ensure cash containment at all times.”
Monhla Hlahla, Chair of the Board of Denel, said in the annual report that Denel’s turnaround has continued at a steady pace since the appointment of the Board in May 2018. “However, progress has not been at the level we’d have desired. It is the Board’s view that Denel’s liquidity challenges began several years before as a result of several factors including: poor inventory and cash management, unprofitable sales and loss making contracts, higher costs with declining revenues, dependency on one large and complex contract which did not proceed as planned, lack of financial discipline, poor governance, mismanagement, overzealous and expensive acquisitions, and general corruption as we are seeing in the case of State Capture (Denel Asia and VR Laser Group) currently before the Zondo Commission.
“A liquidity management plan was put together and included an application for a capital injection of R2.8 billion from the fiscus. We are pleased that the shareholder approved a R1.8 billion conditional capital injection into Denel SOC and we anticipate a further approval of funds to be injected in the 2019/20 financial year. The Board is comfortable that the capital injection will provide Denel the ability to restart its key engines to recovery.”
du Toit said in the report that Denel has reached a critical stage in its transition towards an organisation that is, once again, widely respected in the global and international defence and technology industries and a valuable public asset that the entire South Africa can be proud of.
“At the core of this process is our efforts to restructure the business through the implementation of a comprehensive turnaround plan, build on our long-standing reputation as a leader in innovation, restore confidence in the leadership of the company, and build committed and motivated employees.
“There can be little doubt that the reputation of the company was badly affected by the revelations regarding state capture and the evidence regarding corruption, mismanagement and poor corporate governance that have emerged in recent months. We have committed ourselves to actively support all official investigations that have been launched to uncover the truth and have already taken decisive steps against proven transgressors, including legal steps to recover funds that were misappropriated,” he stated.
It was not all bad news, with du Toit saying Denel projected a moderate growth in revenue from R3.86 billion in 2020 to R5.54 billion in 2021 and R7.14 billion in 2024.
“During the year we submitted a request to government for R2.8 billion for the recapitalisation of Denel and received R1.8 billion in August from the shareholder. This represents a tremendous display of confidence in the underlying value of the business and a realisation that Denel is still uniquely placed to support the local defence and security sectors and has the potential to play a leading role in the country’s transition towards the 4th industrial revolution.
“Denel has secured a solid order backlog of R18 billion which covers roughly four years of sales revenue. In addition, we are pursuing a winnable order pipeline of R30 billion over the next 24 months.”