Scale of Denel’s problems revealed in annual report

18th October 2019

By: Rebecca Campbell

Creamer Media Senior Deputy Editor

     

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South African State-owned defence industrial group Denel recently released its annual report for the 2018/19 financial year (FY). By just about every metric, the group’s position deteriorated from FY 2017/18 to FY 2018/19. In FY 2018/19, revenues were R3.8-billion, down from R5.8-billion in FY 2017/18. But borrowings went up to R3.4-billion in FY 2018/19 from R3.3-billion in FY 2017/18. Note how close the FY 2018/19 figure for borrowings is to the number for the revenues for that same year. The debt equity ratio was –2.05:1 in FY 2018/19, compared with 7.39:1 in FY 2017/18.

The group’s losses worsened to R1 749- million in FY 2018/19 (from R1 053-million in FY 2017/18). Cash fell dramatically to R575-million in FY 2018/19 from R1.3-billion in FY 2017/18. Research and development (R&D) spending collapsed to R108-million in FY 2018/19 from R769million in FY 2017/18. (R&D spending for FY 2018/19 was actually budgeted at more than R454-million, but this could not be achieved because of “liquidity constraints”.)

In FY 2018/19, spending on skills development also fell, to R32-million (from R52-million in FY 2017/18), while corporate social investment saw a huge decline, to R593 000 (from R9.4-million in FY 2017/18). And the workforce was reduced to 3 968 (from 4 629 in FY 2017/18).

Denel’s business divisions are Denel Aeronautics, Denel Dynamics, Denel Land Systems (DLS), Denel Overberg Test Range (OTR), Denel Pretoria Metal Pressings (PMP), Denel Sovereign Security Solutions (Denel S3), Denel Vehicle Systems (DVS) and LMT. In FY 2018/19, in comparison with FY 2017/18, Denel Aeronautics’ revenues fell by 25% and its export revenues by 55%; Denel Dynamics’ revenues came down by 57% and its export revenues by 62%; DLS revenues declined by 25% and its export revenues by 32%; OTR’s revenues decreased slightly, by 3%, while its export revenues fell by 34%; PMP’s revenues dropped 49% and its export revenues by 67%; DVS revenues fell by 56% and export revenues by 62%; LMT revenues were down by 11% but it accrued export revenues of R137-million in FY 2018/19, compared with zero in FY 2017/18. There are no figures for Denel S3.

“After 18 months of walking in the dark, the board, [appointed in May 2018], is [glad] to announce that Denel has core products, basic systems and skills which form the critical and required base for an effective business turnaround,” assured chairperson Monhla Hlahla in her introduction to the report. “However, the journey to a positive outlook requires very tough choices by the board and, in particular, the policymaker (Department of Defence) and the shareholder (Minister of Public Enterprises), to craft a smaller, focused, responsive value-adding and standalone business with limited to zero dependence on the fiscus in the long term.”

On the brighter side, Group CEO Danie du Toit pointed out that Denel had a “solid” order backlog of R18-billion, which equated to about four years of sales revenues, and was contending for a “winnable order pipeline” over the next two years that would be worth R30-billion. It had exited onerous contracts valued at R250-million, cut its operating costs by R500-million, cut head office costs by R15-million and planned further operating cost cuts over the next year. Further, there was a good chance of generating cash of R1.56-billion by divesting noncore assets, while another R2-billion could be brought in by means of strategic equity partnerships. More than 40 international and national defence companies had expressed interest in buying Denel assets or entering into strategic equity partnerships.

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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