FILE PHOTO: Denel company logo is seen at the entrance of their business divisions in Pretoria
JOHANNESBURG - Denel's auditors are satisfied that the state-owned arms maker’s management has taken enough “mitigating steps” to ensure that that company turns around from the R1.7 billion loss it reported in the year to end-March. 

Nevertheless, there remained a “material uncertainty” whether it could continue as a company, the group said in its latest annual report. According to the report, Denel received R1.8bn from the government in August and R1bn in April this year to alleviate a cash crisis. Revenue fell 40 percent to R3.8bn from R5.8bn for the year, while the net loss widened to R1.75bn from R1.05bn. Borrowings were R3.4bn. 

The number of employees dropped 14 percent to 3 968 from 4 629 the previous year. The figures should be read bearing in mind that the auditor-general gave the financials a disclaimer audit opinion, principally because a lack of proper accounting and financial data and records had rendered the auditor unable to determine figures such as irregular and wasteful and fruitless expenditure.

Chairperson Monhla Hlahla said a turnaround strategy was being implemented at a steady pace since the new board was appointed in May. Their initial focus had been to deal with the cash flow problem, which had been compounded by a lack of credible financial data, as well as mismanagement and a lack of leadership accountability already in the company. 

“The operating culture of fear and mistrust emanating from the era of state capture has continued in the company, although slightly improved,” she said. 

They had an order backlog of R18bn that should cover four years of sales revenue and “a winnable order pipeline of R30bn” was being pursued over the next 24 months. 

Denel was experiencing strong demand for its products in the Asia Pacific and Middle Eastern regions. During the year India had joined the US and China as one of the top five biggest military spenders in the world. South Africa accounts for 49 percent of Denel’s sales, Asia-Pacific countries 24 percent and the Middle East 12 percent. Hlahla said origins of the cash crisis had its roots in the company seven years before and was due to poor inventory and cash management, unprofitable sales and loss-making contracts, rising costs, lack of financial information, poor governance, mismanagement, overzealous and expensive acquisitions and general corruption.

Several forensic reports had been concluded and were being reviewed by the board, which in some instances had referred the matters for further civil and criminal legal action, she said. 

Steps to improve its financial position include selling off non-core assets of R1.56bn, generating strategic partnership activities with R2bn, exiting onerous contracts worth R250m, reducing costs. 

The turnaround strategy included moving away from the reliance on debt to operate, reducing operational costs, cutting spending, rationalising business structure and renegotiating onerous contracts. Chief executive Daniel du Toit said the medium-term projection was for a moderate growth in revenue from R3.86bn in 2020 to R5.54bn in 2021. 

He said Denel needed to consolidate its product portfolio, reduce the cost base, enhance efficiencies in programme execution and improve the management of working capital. 

An in-depth review of cost structures was under way to identify areas for cost reductions and explore initiatives that will lead to improvements in liquidity, he said.