'Beaten up' by state capture, Denel needs more government funding to survive

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Photo: Reuters
Photo: Reuters
Photo: Reuters
  • Denel board and management updated Parliament on Wednesday about financial and governance challenges facing the company.
  • The state-owned arms manufacturer, which is due to report a R1.8 billion loss for the 2019/2020 financial year, said it is borrowing more than it can afford to pay.
  • It also cannot afford to pay full salaries for staff and has seen an exodus of critical skills.

Exodus of critical staff, incurring debt that it cannot repay and consistent revenue collapse since 2017 has put state arms manufacturer Denel's status as a going concern in question.

The company, which lost its CEO Danie du Toit in July, has recorded a R1.8 billion unaudited loss for the 2019/2020 financial year. And without a capital injection from government, it faces a risk of losing more employees, as it has not been able to pay full salaries to most staff and may struggle to borrow as its equity is already below sustainable levels of R4 billion, with which investors are comfortable.

Interim group CEO, Talib Sadik who stepped in in order to steer Denel when Du Toit left, told the portfolio committee on Public Enterprises that there is low staff morale and the arms manufacturer's relationship with organised labour has become very strained. The company has lost critical skills in its missiles' division. Majority of the group's businesses are loss making, and essentially, the company is less capacitated to carry out its duty as the custodian of sovereign defense in South Africa.

But Denel is hoping that the department of defence (DoD) and its shareholder, the Department of Public Enterprises (DPE), can help it get the funding it needs in the short-term to carry out its duties to the country's defence force.

"The emergency funding talks to the funding we are seeking from the DoD for our sovereign and strategic capabilities. In the past, we've been funding that from our very weak balance sheet. For this year, we've asked the DoD through the DPE for funding of around R683 million," said Sadik.

The aftermath of state capture 

There are several reasons why Denel finds itself in this situation. Sadik told the Committee that from 2017 Denel's revenue dropped significantly as declining department of defense (DoD) budget, saw Armscor, the acquisition agency for the department, order fewer arms from the company. But Denel's entanglement in the state capture left long-lasting damage.

"We had misalignment with our key stakeholders. During the time of state capture, we had poor governance, poor controls in the company. We've had poor leadership and management in the company," said Sadik.

Sadik and Denel CFO, Carmen Le Grange who both ascended to management positions after the state capture had ravaged the company said there was also poor programme management and today it is faced with penalties from these projects.

The financial year 2016/17 was also the last one in which Denel received a clean audit, although Sizwe Ntsaluba Gobodo raised concerns about "material uncertainty" about the company's going concern status at the time. Since then, Denel has received disclaimers every year from its auditors and Auditor General of SA.

Going concern worries

The combination of falling revenues and poor controls created an unsustainable cost base for Denel and level of debt that the company is struggling with. Despite R1.8 billion recapitalization it got from National Treasury in August 2019 and an additional R305 million of the R576 million allocated to Denel for the 2020/21 fiscal year.

Faced with hefty quarterly interest bills since most of its debt is short-term, Denel has been unable to unable to use even the little revenues it generates to fund most of its working capital, let alone invest in new projects it wants to start to diversify its revenue streams.

"Our equity levels and equity ratios are completely negative which means we borrow more than we can afford to pay," said Le Grange.

She said Denel's auditors are currently looking at the company's financial statements.

"Of course, they are deliberating around going concern matters due to our severe liquidity crisis," she added.

Le Grange said being "drip-fed" funds doesn't work for Denel and neither is the short-term nature of its borrowing because juggling with the little money it gets, it is also now taking longer to repay creditors.

Denel board chairperson, Monhla Hlahla said she believes that if all stakeholders – including the DoD, DPE, Treasury and Amscor – can work together with speed, Denel could be one of the state-owned companies that if "salvaged" can one day stand alone.

"I believe that Denel can be saved if we just move fast. Just move fast not only as Denel but with the shareholder, DPE, DoD. Where we do not agree come together because speed is of essence when you are dealing with a very vulnerable and weak entity which Denel has been beaten up to," she said.

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