Denel posts R390 million profit

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State-owned defence company Denel posted a profit of R390 million before interest and tax for the year ending March 2023, it told parliament’s standing committee on public accounts (Scopa) on Wednesday.

The company posted a loss of R1.5 billion in 2020, the same year it last tabled an annual report, and has not generated a profit since 2016-17.

It has been insolvent since 2020, and in that year was unable to pay into its employee pension fund or taxes, necessitating an emergency government loan guarantee of R580 million to pay salaries and suppliers. 

The company has experienced an exodus of hundreds of highly specialised staff because of its inability to pay salaries, which in turn affected manufacturing.  

A bailout of R3.6 billion from the treasury in the 2021-22 financial year assisted the company with repayments of its debts as it continued with its five-year turnaround strategy, but did not deal with “the fundamental operational challenges”, interim chief financial officer Thandeka Sabela told Scopa.

The operational problems were addressed with the unbundling of R992 million through the Denel Medical Benefit Trust (DMBT) in August 2022, the sale of non-core assets of R1.8 billion and the recapitalisation funding of R3.4 billion received in March this year.

The R992 million was used mostly on working capital to restart operations and normalise labour relations, while R605 million from the recapitalisation was used for operations, restructuring and towards legacy obligations.

The balance of the funds, according to Sabela, would be used to clear additional legacy obligations and support the growth phase of the turnaround plan.

The company did not table financial statements between 2020 and 2022 and submitted late to the auditor general. Sabela said this was because of the high staff turnover, the result of salaries not being paid. It has submitted its statements for March 2023.

The auditor general, however, did not start auditing because the company owed it money, meaning it had to table a payment plan. Once the payments started, the auditor general started on the books. Sabela said it was not clear when the audit results would be published, but it was understood that they would be done concurrently.

Denel’s irregular expenditure stood at R3.2 billion, she said, which included legacy amounts. There had been “quite a lot of work done” to reduce on-year irregular expenditure while dealing with legacy amounts.  

Irregular expenditure for the 2023 financial year stood at R20.193 million. The main contributors to this were deviations from competitive bidding processes (R9.6 million) and tax clearance certificates not being obtained (R10.17 million).

Annual incurred irregular expenditure had decreased by 98% since April 2018.

The company in 2019 commissioned an investigation into irregular expenditure, but this could not be completed because of liquidity constraints. She said the investigation would take place and was set to be completed in 2024.

But Scopa members remained concerned with the number of interim/acting positions at the company, but were told that the posts of group chief executive, group chief financial officer and other executives would be finalised by October this year.

After the meeting, Denel released a statement saying that its restructuring would be complete within six months.  

“[This] will reposition the state-owned defence and technology company to efficiently execute existing orders and grow its business through the existing opportunity pipeline.”

The conclusion of Denel’s restructuring was expected “soon”, according to the statement, which would culminate in a new operating model with focus on weapons, integrated systems solutions, landwards and air.

“The existing Denel operating divisions will be arranged to fit in with this structure and will be accompanied by a reduction in the company’s property footprint and a rationalisation of facilities.”