The Department of Public Enterprises has painted a gloomy picture of Denel, which is insolvent, heavily indebted and unable to pay full salaries and raise working capital to fund operations.
In a presentation prepared for parliament on 14 October, the Department of Public Enterprises (DPE) stated that Denel had a difficult first and second quarters for the 2020/21 financial year due to a combination of factors, including the COVID-19 pandemic and liquidity challenges.
“As a result, over the year-to-date (April to July 2020), Denel recorded sales of R364 million which is 79% behind the 2020/21 Corporate Plan budget.
“Due to the weak financial position and reduced cash from operations, Denel is unable to meet all its financial obligations including the payment of full salaries from May 2020 to date. This resulted in organized labour approaching the Labour Court for relief. The Court found against the SOC [State Owned Company] and instructed Denel to settle the outstanding payments. Denel is yet to satisfy the court order.”
The DPE said that the snowball effects are that:
Denel is unable to raise adequate working capital to fund operations. In April 2020, Denel lost a R6 billion contract because it could not raise the required bank guarantees,
Hostile relations with suppliers (refusing to extend credit or demanding upfront payments)
Exodus of highly skilled engineers critical to the integrity of Denel’s capabilities and the completion of some of the key contracts. Between July and August 2020 Denel lost over 80 engineers mainly because of the liquidity and salary challenges
The Department said it is engaging critical stakeholders on the short term issues facing the entity as well as on long term repositioning of the company. The Justice, Crime Prevention and Security Cluster has been appraised of Denel’s situation and options related to future state of the entity
The DPE added that Denel is currently insolvent and recorded a loss of R1.7 billion for the 2019/20 financial year, increasing negative equity to over R2 billion. “This has been mainly due to a significant decline in revenue over the past three years.”
“Denel’s equity has been significantly below the levels (R4 billion) required by investors,” the DPE presentation said, with Denel “in a debt trap.”
Although Denel received an equity injection of R1.8 billion in the 2019/20 financial year with another R576 million allocated for the 2020/21 financial year, this “is not adequate to resolve the liquidity and solvency challenges faced by the SOC.”
“Results for the first quarter of the 2020/21 financial year are significantly below budget,” the DPE presentation said. “It is unlikely that the budget for the year will achieved given the current liquidity challenges and the impact of the COVID-19 pandemic. Furthermore, the financial projections for the 2020/21 financial year are expected to be revised due to the impact of COVID-19.
“The SOC’s assets are predominantly funded by debt. Over reliance on debt and the negative equity position have put Denel in a debt trap. Denel has been relying on debt to finance its working capital requirements. Currently Denel pays in excess of R300 million interest costs per annum which adversely impacts the profitability of the company.”
Denel’s revenue for the third quarter of the 2019/20 financial year was R1.6 billion and R2.6 in the fourth quarter, dropping to R231 million in the first quarter of 2020/21. Operating expenses were R1.2 billion, R1.5 billion and R314 million respectively.
Net loss was R1.3 billion for the third quarter and R1.6 billion for the fourth quarter of 2019/20 and R97 million for the first quarter of the 2020/21 financial year.
Borrowings for the third and fourth quarters were R1.8 and R3.4 billion and R3.4 billion for the first quarter of 2020/21.
National Treasury last week said Denel had asked for R3.8 billion rand in state financial support over the next three fiscal years while the Department of Defence (DoD) has appointed a Save Denel technical team.
African Defence Review Director Darren Olivier believes the R3.8 billion injection should be granted, “though not without a proper plan for how to sustain the parts of Denel that are sovereign, but not necessarily profit-generating, and ensure the parts that can be made commercially viable are allowed to do that free of political objectives.”