Denel still financially distressed – Godongwana

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Finance Minister Enoch Godongwana singled out Denel, along with three other State-owned enterprises (SOEs), as being in poor financial health, with the Centurion-headquartered defence and technology group remaining in “financial distress”.

Godongwana yesterday (Wednesday, 1 November) delivered his medium term budget policy statement (MTBPS) in the National Assembly, painting a gloomy picture for SOEs.

On Denel specifically, he is reported by SAnews as saying it remains in financial distress with no annual financial statements submitted since the 2019/20 financial year.

“In March 2023, government disbursed R1.9 billion to Denel through the Special Appropriation Act (2022). The disbursement was proportionate to the entity’s share of proceeds from the sale of non-core assets. Denel used this funding to help settle debt obligations, pay for restructuring and enhance working capital.

“The remaining portion remains ring fenced until other non-core assets are sold. In September 2023, Denel requested that a further R100 million of the ring fenced funds be released to settle the last government guaranteed debt obligation. Following its settlement, Denel has no debt obligations remaining and its government guarantee will be revoked,” the Ministerial address said.

On SOEs generally the Finance Minister told parliamentarians that “since 2019, weak economic growth compounded the poor financial position of most state-owned companies”. Capital investment continued to slow, falling below company budgets, with some large enterprises facing serious liquidity problems.

“Operational inefficiencies, high cost structures and onerous debt obligations continue to hamper profitability and cash flows, intensified by non-payment for services. Many companies are unable to attract funding at favourable rates and terms, and rely on fiscal funding for support.”

SOE debt repayments are expected to reach R121 billion over the medium term.

Denel has been upbeat about its prospects, particularly following a demonstration day at the Alkantpan test range in mid-August where local and foreign delegations viewed its artillery, armoured vehicle, unmanned aircraft and other solutions.

Interim Denel Group CEO Mike Kgobe in September updated the Portfolio Committee on Public Enterprises about progress at the state-owned defence conglomerate. He explained the nearly R1 billion received from the Denel Medical Benefit Trust (DMBT) last year allowed Denel to pay its salary backlog and pay suppliers in order to resume production.

He said Denel is by and large being stabilised through the DMBT funds, and that the additional recent R3.4 billion Treasury recapitalisation has also gone a long way towards stabilising the company (55% of the latter, or R1.8 billion has been received so far with the remainder to be released once certain conditions are met). These capital injections have enabled Denel to restructure, right-size and reposition towards its new business model that will, amongst others, take it from six divisions to four operating units (Guided Weapons, Land, Air, and Integrated Systems).

Denel requires R2.29 billion to complete its turnaround plan, and the cash required will come from the sale of non-core assets and the remainder of recapitalisation funds from National Treasury.

The turnaround plan aims to secure the existing customer base, Kgobe said, adding that over the last several months Denel has had discussions to restart key programmes such as Hoefyster, which has been ‘on pause’ for the past five years. Denel has also been able to restructure activities around the A-Darter missile for the South African Air Force (SAAF) following engagement with Armscor and the SAAF. The Dynamics division, which covers unmanned aerial vehicles and guided weapons, was hit hard by critical skills losses but Kgobe said the guided weapons capability is being restored, and progress has been seen in the last few months.

“We are now moving into the growth phase, and chasing new revenue streams around the world as well as identifying numerous opportunities. There have been requests for proposals internationally and we are busy responding to that,” Kgobe said.

With regard to the sale of non-core assets, Denel is in the process of selling the Denel-owned properties being used by Rheinmetall Denel Munition (RDM) and Hensoldt South Africa back to those companies.

Kgobe told the Public Enterprises committee that Denel is “making significant progress regarding export opportunities,” with a R30 billion opportunity pipeline locally and internationally. The company’s current annual order book is standing on R1.9 billion, with half of that secured.

For the SA National Defence Force, Denel is focussing on several critical issues in the short term, including C-130, Oryx and Rooivalk support; concluding phase 1 development of the Badger infantry fighting vehicle; restarting Project Kamas for A-Darter missiles; and delivering G5 and G6 artillery upgrades for the SA Army.