EDITORIAL: Talib Sadik has a sturdy plan but he can’t turn around Denel on his own
Group is executing what looks like a coherently drawn up turnaround plan, though it has the backing of the government only on paper
Being CEO is hard work but doing it at Denel — or any of the floundering state-owned enterprises — comes with an added degree of difficulty.
On Monday Denel picked Talib Sadik, a nonexecutive director, to run the show on a temporary basis, replacing Danie du Toit, who abruptly resigned after less than two years at the helm.
One could argue that Sadik, a chartered account, should be made a permanent CEO given his stellar reputation and track-record when he was in charge between 2008 and 2012. Under his leadership Denel was profitable and it continued to grind out profits for a few years after his departure before swinging into a loss of R1.7bn in 2018. Then the years of mismanagement and state capture followed.
But it would not matter. Sadik is inheriting a company in the middle of executing what looks like a coherently drawn up turnaround plan, which unfortunately has the backing of the government only on paper.
Under the plan, with Sadik part of the team that conceived it in 2019, Denel wants to cut costs, mainly via retrenchments, and sell equity stakes in some of its businesses while almost doubling sales in four years.
Equity sales and partnerships involving businesses like Denel Land Systems, missile unit Denel Dynamics and Denel Aeronautics should help raise R4.4bn by the end of 2022. Improving the accuracy of demand forecasts, reducing staff costs and selling noncore businesses, including Denel Aerostructures, could net the company almost R900m in further savings, Denel’s board told a parliamentary committee almost a year ago.
In that presentation, the board aimed to start disposing of equity stakes and exiting loss-making businesses within months. It would be exactly a year in September, and there has been little to show for it.
It’s all down to tardy approval processes by the government on cutting its salary bill, which soaks up an astonishing 45% of the company’s R3.8bn annual revenue, and selling noncore assets and equity stakes. The lack of urgency from the government is baffling given what is at stake
In 2018 Denel held out a begging bowl, seeking R2.8bn cash to fund day-to-day expenses and carry through the turnaround plan. But finance minister Tito Mboweni allocated about 64% of that money, which came four months later than Denel expected and forced it to get a bridge loan to tide itself over until the cash came through.
In addition, the national conventional arms control committee (NCACC), a group of ministers that hands out permits for ammunition exports, blocked arms sales to countries including Saudi Arabia and UAE late last year after the two Middle Eastern countries rejected a clause in export documents that allows SA officials to inspect their facilities to ensure compliance and that requires these countries to sign end-user certificates pledging not to sell their weapons to third parties.
To take human rights and regional conflict into account before issuing export licences is a good thing but it has had the unintended consequence of bringing exports to a standstill as some countries feel inspections encroach on their sovereignty, putting at risk billions of rand in business for Denel and others in the industry. Saudi Arabia and the UAE, which are involved in the bloody war in Yemen, alone accounted for a third of SA’s R4.7bn of authorised arms exports in 2018, according to data compiled by the NCACC.
With long delays in getting approval to reduce its salary bill and revenue being destroyed by stricter criteria for arms exports permits, it is no surprise that Denel burnt through all of that bailout package in a few months and is unable to pay staff salaries.
Sadik’s glorious past at Denel may not be enough to help the company emerge from the crisis if the government’s support for the turnaround strategy is anything like we’ve seen under Du Toit, whose last day in office was last Friday.
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