Denel tells Parliament it’s optimistic about the future

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With salary payments – at long last – up to date, Denel is cautiously optimistic about the future, going as far as telling a Parliamentary oversight committee significant changes are coming to ensure a credible future for the State-owned company (SOC).

Seven immediate interventions are listed if the State-owned defence and technology conglomerate is to fully extricate itself from the mire of State Capture and mismanagement, Denel told a Portfolio Committee on Public Enterprises meeting this morning.

They are: effective stakeholder management to initiate a repositioning strategy to ensure the Denel brand “continues to enjoy market support” with a concerted business development effort for product marketing; “unshackling” legacy debt; restructuring for efficiency; reducing the cost base, including head count; implementing streamlined and effective policies and processes across the board from contracting through to engineering, manufacturing and project execution as well as skills development and retention; developing access to new revenue streams; and enforcing effective management and executive leadership capabilities to lead restructuring.

Portfolio committee members heard further the strategic intent is to “reduce dependence” on the fiscus (read National Treasury) and recapitalisation “will set” Denel on a solid basis with restructuring rightsizing it to “current revenue levels”.

Exports, the Public Enterprises committee heard, will increase economies of scale to further support funding strategic and sovereign capabilities.

“These will be managed through ring-fencing and flexible resourcing to minimise the impact of rapid declines in exports like the cliff face experienced during the COVID-19 pandemic.”

In another optimistic prognosis the presentation has it “in-country capabilities will minimise the cost of securing and maintaining strategic capabilities” while “alignment” with Armscor and the Department of Defence (DoD) will be done on sovereign and strategic capabilities. Funding will be identified and articulated via a formalised tripartite memorandum of co-operation between the DoD, representing the SA National Defence Force (SANDF), Armscor and the Department Public Enterprises (DPE), representing Denel.

Still on the bright side, the presentation has it planned growth will result in about a thousand direct high quality jobs, with a 4:1 multiplier for indirect jobs of 4 000, in the next three years. “Targeting 5 000 direct and 20 000 indirect jobs with a return to 2017 revenue levels in five years” is how work retention and creation is summarised.

“Once Denel has been stabilised and reputational damage restored, the organisation will employ a strategy of credible long-term strategic partnerships in all its businesses to entrench positions in local and international markets aligned to national interests,” maximising intellectual property and capabilities values in Denel.

At present, Denel has R3.3 billion in legacy debt and owes R966 million to suppliers. A restructuring cost of around R577 million and working capital of approximately R400 million is required to execute work on hand and return the company to profitability. Treasury will settle R2.9 billion of Denel’s guaranteed debt while around a billion from the Denel Medical Benefit Trust has gone towards settling outstanding salaries and meeting operational funding needs.

In July, the Minister of Finance urged Denel fast track disposal of non-core assets which would raise R1.8 billion. “Good progress has been made on the disposal. Funds received (R992 million) from the Denel Medical Benefit Trust were instrumental in providing some stability and restarting operations with payment of backlogged salaries, institution of a SARS payment plan and payment of creditors threatening liquidation actions as well as allocation to critical working capital. Realisation of a further R400 million from the disposal of non-core assets is probable before the MTEF budget in February 2023. Funding for available working capital and payment plans will run out by October  if interim relief is not secured. Operations will be stalled and Denel will again be severely exposed. The company will continue to raise internal funding through the sale of non-core assets,” Denel said.

Denel believes it can succeed as it has a R12 billion confirmed order book and around R8 billion in opportunities.

“The geo-political instability in Europe and other parts of the world is going to give impetus for significant defence industrial requirements. If Denel is returned to a sound footing, this should be exploited and will yield many opportunities,” the company said.

It added “there is still significant interest in Denel’s battle proven intellectual property (IP). Despite its financial difficulties, there is still appetite by numerous countries and companies to acquire Denel products or form deeper strategic relationships.”