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- Denel’s board and management briefed Parliament on Wednesday on the financial and governance challenges facing the company.
- The state-owned arms maker, which is due to report a loss of R1.8 billion for the 2019/2020 financial year, said it is borrowing more than it can afford.
- It also cannot afford to pay full staff salaries and has experienced an exodus of critical skills.
The exodus of critical personnel, incurring debt that it cannot pay and the steady collapse of revenues since 2017 has cast doubt on the status of state-owned arms manufacturer Denel as a going concern.
The company, which lost its CEO Danie du Toit in July, posted an unaudited loss of R1.8 billion for the 2019/2020 financial year. And without an injection of capital from the government, you risk losing more employees, as you have not been able to pay full salaries to most of the staff and may have difficulty obtaining loans, as your capital is already below levels. R4 billion sustainable, which investors are comfortable with.
The group’s acting chief executive, Talib Sadik, who stepped in to lead Denel when Du Toit left, told the Public Companies portfolio committee that there is low morale among the staff and that the arms manufacturer’s relationship with the unions has been shaken. become very tense. The company has lost critical skills in its missile division. Most of the group’s business is loss-making, and the company is essentially less able to fulfill its duty as custodian of sovereign defense in South Africa.
But Denel hopes that the Department of Defense (DoD) and its shareholder, the Department of Public Enterprises (DPE), can help him obtain the funds he needs in the short term to carry out his duties with the country’s defense force.
“Emergency funding speaks to funding that we seek from the DoD for our sovereign and strategic capabilities. In the past, we have been funding that from our very weak balance sheet. For this year, we have asked the DoD through the DPE for a funding of around 683 million rand, “said Sadik.
The aftermath of state capture
There are several reasons why Denel is in this situation. Sadik told the committee that starting in 2017 Denel’s revenue dropped significantly as the Department of Defense (DoD) budget decreased, saw Armscor, the department’s procurement agency, order fewer weapons from the company. But Denel’s entanglement in the capture of the state left lasting damage.
“We had misalignment with our key shareholders. During the time of the state takeover, we had bad governance, poor controls in the company. We have had poor leadership and management in the company,” Sadik said.
Sadik and Denel’s CFO Carmen Le Grange, who rose to managerial positions after the state capture devastated the company, said there was also mismanagement of the program and that today it faces sanctions for these projects.
The 2016/17 fiscal year was also the last in which Denel received a clean audit, although Sizwe Ntsaluba Gobodo raised concerns about “material uncertainty” about the going concern status of the company at the time. Since then, Denel has received resignations each year from its auditors and SA Auditor General.
Worries of concern
The combination of falling revenue and poor controls created an unsustainable cost base for Denel and the level of debt the company is struggling with. Despite the rand 1.8 billion recapitalization it obtained from the National Treasury in August 2019 and an additional R305 million from the R576 million allocated to Denel for fiscal year 2020/21.
Faced with hefty quarterly interest bills, since most of his debt is short-term, Denel has been unable to use even the little income he generates to finance most of his working capital, let alone invest in new ones. projects you want to start diversifying. your sources of income.
“Our capital levels and capital ratios are completely negative, which means we are borrowing more than we can afford,” Le Grange said.
He said Denel’s auditors are examining the company’s financial statements.
“Of course they are deliberating on going concern issues due to our severe liquidity crisis,” he added.
Le Grange said receiving “trickle-fed” funds doesn’t work for Denel and neither does the short-term nature of his loans because, by juggling what little money he does get, he’s also now taking longer to pay off creditors.
Denel’s board chairwoman Monhla Hlahla said she believes that if all stakeholders – including the DoD, DPE, Treasury and Amscor – they can work together quickly, Denel could be one of the state-owned companies that, if they “rally,” will one day be able to support themselves.
“I think Denel can be saved if we act fast. Just act fast, not just like Denel, but also with the shareholder, DPE, DoD. Where we disagree, they come together because speed is essential when dealing with a very vulnerable situation. . and a weak entity that Denel has been hit with, “he said.
