Board takes bold steps to clean up Denel as company posts negative financial results


While Denel has posted modest profits for the past seven years, the significant losses in the company’s 2017/18 results clearly show a business that has had a difficult year, marked by lapses in governance, mismanagement and poor contract execution that resulted in severe liquidity challenges.

This has been further compounded by R500 million in irregular expenditure and a disclaimer audit opinion by the Auditor-General, which is of grave concern to the company.

A new board was appointed on 7 April 2018 with a clear mandate from the shareholder, which included:

* Rebuilding and strengthening governance;
* Rooting out corruption;
* Restoring the financial standing; and
* Ensuring that SOCs fulfil their economic and developmental mandates.

The board has also appointed a panel of forensic investigators to probe procurement irregularities, while also working with the Special Investigating Unit (SIU) to identify and root out any corruption to ensure that people responsible for any criminal acts are held accountable. Irregular appointments of employees and business partners are also under investigation.

Parallel to these actions, another process is under way to unwind Denel Asia, the company that featured prominently in the Public Protector’s report. Denel has also terminated all the contracts with VR Laser.

Financial performance

Revenue for the year has dropped by 38% to R4.9 billion (2016/17: R8 billion) driven by delays in two of the group’s major programmes. The development phase of the programmes were delayed, leading to cost increases and delays in production. The liquidity challenges further affected deliveries to clients as suppliers were finding it difficult to deliver on critical components required.

The export revenue, at 55%, has decreased by 8% to R2.7 billion, due mainly to reduced sales in the Asia Pacific and Middle East regions. The gross margin loss of 2.42% (2016/17:22%) deteriorated as a result of the high base cost, which could not be recovered as revenue and plant activity were at very low levels. The operating costs were under severe pressure, which included negative impacts brought on by foreign exchange losses of R273 million (2016/17: R232 million).

The decline in revenue led to reduced earnings before interest and tax (-R1.4 billion) compared to the prior year (2016/17: R556 million). This was against the background of an increase in net finance costs to R292 million (2016/17: R272 million); largely as a result of the increased cost of borrowings. The net loss was negated by the 46% increase on income from associates compared to the prior year (2016/17: R154 million).

Total assets have decreased to R11 billion (2016/17: R12.5 billion), driven mainly by the decrease in cash and cash equivalents R1.3 billion (2016/17: R2 billion).

The company is undertaking a review of the cost base to ensure the business is able to contain costs at a sustainable level.

Business outlook

Denel continues to provide a strong and innovative technology base to provide an independent defence industrial capability that supports the mandate of a modern, balanced and technologically advanced South African National Defence Force (SANDF).

Such a mandate is required to protect the economic growth and security of the Republic of South Africa (RSA). Denel has a track record of a sustainable business performance, albeit at modest profit levels. This position is further supported by the substantial order book of Denel at around R18 billion.

The business focus, going forward, will be to:

* Restructure the cost base to acceptable levels, without compromising on delivery of technologically advanced products to the customers;
* Strengthen the balance sheet, improve solvency and adopt stringent working capital measures to ensure cash containment at all times;
* Strengthen the control environment in order to improve financial reporting throughout the group.
* Support the Growth & Turnaround Strategy of the company to propel Denel into a sustainable future.
* Support a leadership and governance turnaround.
* Fast-track the process of appointing a new group CEO.

In conclusion

While the medium- to long-term position of Denel is confirmed by its role as a national strategic asset, and underpinned by a sound order-book and proven world-class capabilities, the short-term outlook is under pressure due to the severe cash constraints.

However, working collaboratively with the board, the Department of Public Enterprises and the National Treasury, Denel is committed to ensuring the turnaround plan will 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. The turnaround of the company is further supported by the Department of Defence to ensure the retention of critical sovereign assets, intellectual property and critical skills that reside within Denel.