The board and management of Denel candidly acknowledge significant losses, lapses in governance, mismanagement and poor contract execution as contributing to its currently troubled state.
At the same time the State-owned defence and technology conglomerate says it is committed to a turnaround plan to set the group on a trajectory of sustainable growth.
“The plan, in part, includes exploring joint venture partnerships at product and divisional levels for increased export market access,” according to a statement issued by Vuyelwa Qinga, Denel Group Executive: Communications and Public Affairs.
When the new Denel board was appointed in April this year its overall mandate included rebuilding and strengthening governance; rooting out corruption; restoring its financial standing; and ensuring fulfilment of economic and developmental taskings in line with nationally set priorities.
Qinga said in the statement a panel of forensic investigators was probing procurement irregularities while working with the Special investigating Unit (SIU) to “identify and root out corruption” and ensure those responsible for criminal acts are held accountable. Irregular appointments of staff and business partners are also being investigated.
“Parallel to these actions, another process is underway to unwind Denel Asia, the company that featured prominently in the Public Protector’s report. Denel terminated all contracts with VR Laser,” the statement said.
Denel’s financial performance dropped by 38% with revenue of R4.9 billion (compared with R8 billion in 2016/17). This was driven by delays in two major programmes, which are not identified in the statement. This saw cost increases and delays in production with liquidity challenges further affecting deliveries to clients and suppliers.
Export revenue at 55% decreased by eight percent to R2.7 billion due mainly to reduced sales in the Asia Pacific and Middle East regions. The gross margin loss of 2.42% (2016/17: 2.2%) deteriorated as result of the high base cost which could not be recovered as revenue and plant activity was low. Operating costs were under severe pressure and included negative impacts brought on by foreign exchange losses of R273 million (2016/17: R232 million).
The decline in revenue saw reduced earnings before interest and tax (R.,4 billion) compared to R556 million the previous year. This was against a background of an increase in net finance costs to R292 million (2016/17: R272 million); largely due to the increased cost of borrowings. The net loss was negated by a 46% increase on income from associates compared to the previous year’s R154 million.
Total assets decreased to R11 billion (2016/17: R12.5 billion) driven mainly by the decrease in cash and cash equivalents of R1.3 billion (2016/17: R2 billion).
To ensure cost containment in future Denel is undertaking a review of its cost base to ensure it remains at a sustainable level, the company said.
“Denel continues to supply a strong and innovative technology base to provide an independent defence industrial capability supporting the mandate of a modern, balanced and technologically advanced SA National Defence Force (SANDF). This mandate is required to protect the economic growth and security of South Africa. Denel has a track record of sustainable business performance albeit at modest profit levels. This position is further supported by a substantial order book of around R18 billion.”
Going forward Denel will focus on five aspects. These are restricting the cost base to acceptable levels without compromising on delivery; strengthening the balance sheet; improve solvency and adopting “stringent working capital measures to ensure cash containment”; strengthening the control environment; supporting leadership and governance and fast tracking the appointment of a new group chief executive.
Denel acknowledges the short term outlook is “under pressure due to severe cash constraints” but is committed to ensuring the turnaround plan will lead to sustainable growth.
“The plan includes exploring joint venture partnerships at product and divisional levels for increased export market access. The turnaround is supported by the Department of Defence (DoD) to ensure retention of critical sovereign assets, intellectual property and critical skills in Denel,” the statement said.
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