Denel unit after state cash: report

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Denel Saab Aerostructures (DSA), the struggling subsidiary of defence group Denel, is seeking a “significant investment” from the government to fund an ambitious turnaround plan, Business Day reports today.

“The designer and manufacturer of military and commercial aviation components continues to weigh on Denel’s finances. Last year it pulled the group into a R543.9 million loss. This year is unlikely to be better,” Business Day says. CEO Ismail Dockrat admits that without DSA, Denel would have been profitable, the paper adds.
defenceweb last year reported DSA had posted a loss of R452.6 million for the year to March 2009, largely because of delays in the Airbus Military A400M programme. Denel group CE Talib Sadik last August said that barring the DSA loss, a smaller loss at Denel Dynamics and interest payments, the group could have posted a profit of R33 million.

Business Day says Dockrat would not be drawn on the exact form of the investment they are seeking from the government.”We submitted our business and turnaround plan to the Department of Public Enterprises about three weeks ago and they are in the process of reviewing it. We hope to sit down with them in the next few weeks ,” Dockrat says. “When a business gets into such a bad state it becomes a downward spiral and urgent intervention is required ,” he told the business broadsheet.

Still, DSA, which has yet to turn a profit and continues to bleed cash, is a great business that will break even in the next five years, he says. “We can either stay as we are or we can close down. But in between … there are several other options. In discussion with our various stakeholders we have come up with a plan that we believe will work.”

Well aware of the criticism of state funding, Dockrat says the government, like any shareholders, would have to decide whether it had faith in management’s ability to turn the company around before making a decision on any investment. “There are several reasons the company continues to lose money,” he says. “Chief among them is problems with the A400M.”

There were lengthy delays in the Airbus A400M programme — the first aircraft only made its maiden flight late last year — and recently some contracts were cancelled. “The A400M had a triple whammy on our finances,” he says. ” We were forced to impair our investment in the programme last year to the tune of R171 million due to the delays. We should have been in full production by this year and that will now only happen in 2014. It also meant we were not earning any real revenue from full production but still having to invest further development of the various components.”

Chief operating officer Theo Kleynhans says while DSA is earning about R100 million in revenue a year from development work on the A400M, “it remains net negative”. A contract to manufacture the ribs and spars of the A400M was cancelled and talks regarding further contracts terminated. This happened after SA pulled the plug on an order for eight A400M aircraft for the South African Air Force (SAAF) last year.
“We can understand the government’s reason for cancelling the order — which accounts for 15% of the total contract value — as well as Airbus’s position, where it is under pressure to provide work packages to other customer nations. However, we continue to talk to Airbus and believe that there is a 50% chance of winning future contracts,” says Dockrat.

Asked whether the Airbus contracts will still be profitable for the group once production begins, he says this is not a given. “But if we keep tight control of every cent and cubit of material, we can still maintain a profit margin.” Quality problems and delays are other snags that have troubled the group in the past, Business Day said.

Last year, DSA had to pay an R11 million penalty to helicopter manufacturer AgustaWestland after it failed to meet a delivery deadline on the SAAF contract for A109 helicopters. “Despite the problems with the SAAF contract, A gustaWestland did award us contracts (to) manufacture components for A109 helicopters to be delivered to Nigeria. They have acknowledged the changes and we believe that they have faith in our ability to deliver in the future,” says Mr Dockrat.



DSA also continues to carry out work on Saab’s Gripen aircraft. “With Thailand having recently bought the aircraft, we believe that we have three to five years of work and possibly beyond, depending on future sales of the aircraft.” Dockrat admits a turnaround will not easy but he is determined to stay the course, the broadsheet concludes.