Parliament’s Public Enterprises Portfolio Committee has heard Denel is “actively pursuing a winnable order pipeline of R30 billion”.
This, Denel chief executive Danie du Toit told the committee this week, “will greatly contribute” to the State-owned defence and technology conglomerate’s financial turnaround and long term sustainability.
Earlier this week Du Toit said a government decision to recapitalise Denel will see it receive a first tranche of R1.8 billion with the balance to come in the 2020/21 financial year.
Du Toit told the parliamentary oversight committee tasked with State-owned companies (SOCs), Denel has “a solid order backlog of R18 billion which covers roughly four years of sales revenue”.
“This includes an imminent export contract – the largest in Denel’s history. This contract with an advance payment of R1.5 billion has the potential to grow Denel’s order stock by 32%.”
Du Toit told the committee Denel has made progress implementing its turnaround strategy in the past six months. There have been improvements in governance and the organisation stabilised in the wake of “devastating revelations” around state capture at Denel.
“The new focus of the board and management is to improve performance, improve liquidity and restore our reputation among stakeholders, partners, suppliers and our own employees.
“The Denel brand is still well-respected. Our products are sought after and we have potential to grow business in our target markets based on quality of product and our reputation,” he said.
In the past 12 months, the company reduced operating costs by R500 million and cut head office costs by R15 million. It cut staff from around 4 500 to 3 587. It renegotiated and will exit onerous contracts to the value of R250 million a year. The company has the potential to generate R2 billion in cash from strategic equity partnerships, the parliamentary committee was told.
An additional R1.6 billion can be generated from selling non-core assets. Denel has received more than 40 expressions of interest from local and international companies to either partner with or acquire parts of its business.
Denel is considering selling or restructuring its Properties division, Denel Aeronautics, Mechem, Spaceteq, LMT and Hensoldt Optronics South Africa.
A multi-disciplinary team is considering these proposals and, in some cases, pre-notification applications as required by the Public Finance Management Act have been submitted. Denel is involved in ongoing consultation with the Department of Defence, Armscor and other stakeholders.
Du Toit said Denel’s liquidity position is fast improving. Government’s decision to recapitalise the business through a R1.8 billion injection, the first in 10 years, will bring stability to the organisation and improve relationships with suppliers and customers. It remains critical to receive a further billion in financial support applied for.
Du Toit expects further phases of recapitalisation to become effective in the next financial year. The company’s debt profile improved with government’s decision to increase its guarantees to five years.
It has emerged that Nedbank, Rand Merchant Bank and Absa provided bridge financing to Denel, which was used mainly to pay salaries. The recent R1.8 billion bailout helped Denel transfer its unemployment insurance and employee taxes to SARS and UIF – these were outstanding for the last several months as only core employee salaries were paid.
“Morale among employees is improving and the company management team has been strengthened in recent weeks with appointments in senior executive positions. It can still count on the skills and expertise of development engineers, technicians and professionals with an average work experience of 15 years.”
The board commissioned forensic investigations into allegations of corruption and state capture and civil claims will be instituted against former Denel executives to recover losses incurred. Statements have been handed to the South African Police Service and the SIU (Special Investigations Unit) to support of investigations into alleged criminal matters. Internal disciplinary hearings have been concluded and others are ongoing.