Denel has reached a critical stage in its transition to, once again, become a respected defence and technology company within the local and global arenas and a valuable public asset that the entire South Africa can be proud of.

The 2018/19 results reflect another very difficult year with revenue as can be expected based on liquidity challenges that affected all operations. However, both the Board and management are of the opinion that the company’s future prospects are bright and that it will return to financial sustainability.

The prospects of a further recapitalisation from the shareholder, will address most of the liquidity issues while a winnable order pipeline of R30bn over the next two years will contribute greatly to long-term sustainability.

Denel is emerging from a period associated with allegations of state capture, financial irregularities and serious lapses in corporate governance. This had a debilitating impact on all areas of business and negatively affected business relationships with partners, suppliers and stakeholders.

The appointment of a new Board in 2018 and new appointments to senior management positions in the past year have created opportunities to rebuild the company with regard to processes, systems, governance and a performance culture.

Shareholder support remains high, which is a reflection of government’s confidence in the ability of the Board and management to implement its turnaround strategy and win new contracts. Government’s commitment to support Denel was demonstrated in a decision to provide R1.8bn towards the recapitalisation of the business with further support expected in the coming financial years.

The company currently has limited financial resources to implement the required changes identified by management and will, in the coming year, have to prioritise.

Far-reaching steps are being taken to restructure the business, reduce costs and exit from onerous contracts, which placed severe pressure on the company’s balance sheet. The measures taken to improve corporate governance and take firm action against individuals involved in irregularities will further strengthen the reputation of Denel and lead to greater confidence in the company.

The focus is now to rebuild trust, respect and credibility with all stakeholders. The Board and management are determined to succeed. Failure is not an option.

Financial overview

The revenue of R3.76bn reflects the low business activities across most of the divisions. Liquidity constraints impacted Denel’s ability to pay suppliers and deliver on contracts on time. Export sales declined by 19% due to the conclusion of a major contract in the Middle East.

The operating loss of R1.9bn can mostly be attributed to the gross loss of R614m driven by contract losses and reduced sales. A mutual agreement between Denel and Airbus to transfer the manufacturing of aircraft parts for the A400M military airlifter out of Denel, subject to fulfilling applicable legal prescripts and a provision relating to cost of exit has been included in the 2018/19 financial year. Denel assessed its investments in subsidiaries and impaired R634m of the investment at Denel Aerostructures as a result of its decision to exit. A further impairment of R43m in Denel Vehicle Systems relating to goodwill of R33m and R10m against the investment was provided for due to the reduction in operating cash flows.

Net financing costs remain high (R340m) as Denel continues to rely on debt to finance its operational costs. Management continues to have positive engagements with lenders, including on a new funding model regarding the ring fencing of major projects.

The net loss of R1.7bn was R696m higher than the previous year, driven primarily by the decline in revenue. This was negated by the 88% increase in income from associated companies.

Total assets have decreased to R8.6bn driven mainly by the decrease in cash and cash equivalents (R575m), a decrease in contract assets (R734m) and in trade and other receivables of R833m.

The total liabilities has decreased by R533m to R10.2bn. Included is the debt of R3.4bn that is fully guaranteed by the government. Subsequent to year-end, the shareholder approved a R1.8bn recapitalisation to restabilise the business and improve the solvency position.

Whilst Denel was able to resolve some of the issues identified by the Auditor General in the previous financial year, the disclaimer remained primarily as a result of incorrect application of standards in recognising revenue whilst additional areas were further identified in the 2018/19 financial year.

In resolving the matters Denel is:

• Building a credible Finance function to enable consequence management through IFRS training and building skills and capacity.
• Improving integrity of the members by working with the Auditor General to address prior year’s audit findings, as well as irregular, fruitless and wasteful expenditure.
• Implementing a liquidity plan for the next five years, including monthly cash flow management.
• Improving internal controls and the control environment by working with internal audit.
• Enhancing business tools for reporting in the business.

Corporate governance

The turnaround plan introduced by the Board remains at the core of Denel’s strategy to return the company to sustainability. Among the key strategic objectives are:

• -To maximise the value of the core business areas
• -To deliver on strategic partnerships
• -To exit non-core business areas
• -To combat fraud, corruption and wastage
• -To drive cost reduction and optimise the utilisation of assets
• -To secure funding and high-level support from the shareholder
• -To grow the order book
• -To ensure the retention of core skills and capabilities
• -To restore Denel’s reputation and improve employee morale

A policy document on fruitless and wasteful expenditure was submitted to the Auditor General following the disclaimer opinion expressed in the 2018/19 financial statements. Corrective actions on issues identified in previous audits are ongoing.

We initiated several forensic investigations into alleged fraud and misappropriation of funds that occurred under the watch of the previous board and management. Several reports concerning improper transactions and potential fraud have been received and referred to legal firms for independent advice.

Denel also cooperates fully with the judicial commission of enquiry into state capture and other investigations to uncover past failures of governance bring perpetrators to book and recover misappropriated funds.

Business outlook

Denel remains a company with substantial assets in terms of technology, experience, intellectual property and the quality of its human resources. It thus remains a valuable national asset with enormous potential to support government’s broader efforts to broaden the manufacturing base and enable the country to participate fully in the 4^th Industrial Revolution.

Our medium term projection shows a moderate growth in revenue from R3.86bn in 2020 to R5.4bn in 2021 and R7.14bn in 2024

Denel has secured a solid order backlog of R18bn, which covers roughly four years of sales revenue. In addition, it is pursuing a winnable order pipeline of R30bn over the next 24 months. Should these contracts be realised it will provide the company with a solid base to implement its corporate plan and return to long-term sustainability.

Going forward, the business focus will be on the continued implementation of the turnaround strategy to improve Denel’s balance sheet.

The process to establish new partnerships, dispose of non-core assets and restructure the business will gather momentum over the next 12 months. This will take place in close cooperation with our shareholder, the Department of Public Enterprises, the Department of Defence and other stakeholders.

Denel is – and will remain – a critical cog in the broader national efforts to create capable state and well-capitalised state-owned companies that can play vital roles in job creation, skills development and infrastructure delivery.

Ends

For further information, contact:

Pam Malinda

Cell: +27 (0) 82 686 2198
Tel: +27 (0) 12 671 2662
email: pamm@denel.co.za

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