State-owned South African defence industrial group Denel is preparing an application for funding from the R13-billion contingency reserve announced by Finance Minister Tito Mboweni in his 2019/20 Budget speech. “We know that government is cognisant of the fact that Denel is in need of additional liquidity to rebuild its finances,” stated Denel group CEO Danie du Toit.

This is one of the reasons the group is confident that the issues raised about it by international ratings company Fitch will be successfully dealt with. Fitch ratings recently cut Denel’s national long-term rating from AA– (zaf) to B (zaf).

In addition, the new board and management have carried out a strategic business review and have developed a turnaround and growth strategy. This has included the determination of the scale and correct timing of government support. The company is confident that a lot of progress has been made.

The new strategy includes the creation of strategic equity partnerships for some of its business units, and the disposal of noncore assets. The strategic equity partnerships would serve to strengthen access to markets and support the development of new technologies. This will be done in such a manner as to grow and protect strategic defence capabilities.

Systems and processes have been implemented that will strengthen governance, increase efficiencies, improve the management of programmes and augment revenues. “We have a new experienced management team, with a number of executive positions currently being filled as we speak. We have a new strategy and a management structure that has recently been approved to stabilise Denel and achieve long-term growth . . . We are confident that the outlook for Denel will be further improved once the implementation of the new strategy and operational plan are in place and all corporate governance issues have been successfully dealt with.”

The group was giving attention to important issues pointed out by the auditor-general’s office – a Chapter 9 institution under the South African Constitution (that is, a State institution independent of government) – in its most recent evaluation of Denel’s financial statements. The group is suffering from a technical skills ‘gap’ with regard to the implementation of the latest International Financial Reporting Standards, and an independent audit company has been contracted to fill this gap within the company. The group’s policies regarding supply chain management are also being reviewed.

Further, the group has created an investigation team to look into “possible irregular expenditure” and to recommend corrective actions. “There will be consequences for those executives implicated in irregularities, including disciplinary and legal action taken against the individuals,” he assured.

The board and management are both determined to restore public trust in Denel. “The board has committed to growing the confidence of our stakeholders and ensuring that Denel once again becomes attractive to customers,” he affirmed. The group is capable of securing its order pipeline and delivering its high-quality defence products to local and international customers.

As of last year, the Denel group was organised into eight business divisions, some of which were further divided into specialised units. The divisions were Denel Aeronautics, Denel Dynamics, Denel Land Systems, Denel Maritime, Denel Overberg Test Range, Denel Vehicle Systems, LMT Holdings (of which Denel owned 51%) and Pretoria Metal Pressings (better known as PMP). These were supported by Denel Industrial Properties and Densecure. Denel also held 49% of Pioneer Land Systems, 49% of Rheinmetall Denel Munition, 49% of Tawazun Dynamics and 30% of Hensoldt Optronics.