South African arms firm braces for more losses, denies ‘trading recklessly’

JOHANNESBURG (Reuters) – South Africa’s state weapons manufacturer Denel expects to make further losses in its current financial year, it said in a presentation on Wednesday as its acting chair denied the company was trading “recklessly” at a hearing by lawmakers.

Denel makes military equipment for South Africa’s armed forces and for export but has struggled for years with liquidity problems. Its latest financial results for the year to the end of March 2020 showed it was insolvent, with liabilities exceeding assets by more than 2 billion rand ($130.6 million).

It forecast a loss of more than 1.5 billion rand for the year to end-March 2021 after a 2 billion rand loss last year.

“We have challenges, but we are not at that stage where … Denel is trading recklessly,” acting chairwoman Gloria Serobe told parliament’s Standing Committee on Public Accounts (SCOPA), responding to questions about the dire state of the company’s finances.

Local law prohibits companies from conducting their business “recklessly” or trading when insolvent.

“We do have plans that we think are doable,” Serobe added, citing long-held plans to get rid of non-core assets.

After the National Treasury did not allocate Denel new bailouts funds in the 2021 budget presented last month, the company suffered a string of resignations from its board of directors.

Serobe described the revelation that there was no financial support in the budget as “quite overwhelming”. She said every six months the board did a financial distress test and every 12 months a “going concern” test.

“It was important for us how the budget speech looks like. And with that, together with our shareholder department we are having to make a plan as to how we answer the going concern test, and how we answer the financial distress test.”

Phumulo Masualle, deputy public enterprises minister, said Denel was a strategic asset for the country and that his ministry was “looking at sharpening the turnaround strategy”.

($1 = 15.3147 rand)