Denel details its strategy to stabilise and grow the Group

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Denel’s chief restructuring officer Riaz Saloojee believes there is now a clear and sustainable business case underpinning the future of the company, which has finally paid all outstanding salaries owed to employees.

Saloojee was speaking at a media briefing hosted on Thursday 11 August. In outlining a comprehensive strategy for the Denel Group, Saloojee focused on a streamlined and sustainable company with the ability to significantly grow its order pipeline and access new revenue streams. Acknowledging the credibility issue that Denel faces, he aimed to rebuild the company’s reputation and capabilities.

“It can be self-sustaining with a R12 billion order book over the next business plan cycle – which is six times current annual revenues,” he noted. “If the turnaround of the business is successful, there is potential to grow the order book to R30 billion in the next three to five years.”

Saloojee said the rationalised Denel will focus on its proven capabilities in the fields of guided weapons, land defence systems, aircraft engineering and maintenance and the delivery of complex integrated systems for the security and cyber environments.

In Saloojee’s view, Denel is still widely regarded as a critical supplier of sovereign and strategic capabilities that provides vital leadership to the local defence industry, which annually exports some R7 billion worth of mostly advanced manufactured products.

He believes there remains a significant interest in Denel’s battle-proven intellectual property. “The rapidly changing global defence environment, as evidenced by the conflict in the Ukraine, as well as instability in many parts, will create opportunities to market the group’s products and form deeper strategic relationships.”

He highlighted Denel’s prime role in supporting the South African National Defence Force (SANDF) to execute its constitutional mandate to safeguard the country’s citizens and territorial integrity. Denel is – and has been – the custodian of key strategic capabilities of the SANDF. As an original equipment manufacturer (OEM) and maintenance, repair and overhual (MRO) facility for numerous critical equipment systems, Denel enables much of the SANDF’s combat capability.

The well-known decline in South Africa’s defence budget had a direct adverse effect on the defence force and on Denel. “We could not fund the necessary capabilities through the defence allocation that we historically used to do,” Saloojee explained. “Whereas the internationally accepted norm for defence spend is 2% of GDP, South Africa currently stands at around .7% of GDP.”

Replying to a question on Denel’s depleted skills base, Saloojee conceded that some highly skilled personnel have left, even going abroad, but in turn many have indicated a willingness to return to the group. However, there is still a vast pool of engineering and technical expertise within the company. He noted that Denel was keen to rebuild its relationship with employees, organised labour, suppliers, and stakeholders.

He pointed out Denel was a stable state-owned company (SOC) between 2010 and 2015. By 2016/17 it was beginning to show signs of decline through a combination of state capture, together with weaknesses in management, leadership, project execution and contract management. Revenue fell from a peak of R8.2 billion in R2015/16 to under R2 billion in 2021/22.

This position was exacerbated by the Covid-19 pandemic, which created the dire position that Denel finds itself in today.

“It was critical that we stop the bleeding and effect a restructuring to retain strategic capabilities, particularly as the defence force needs Denel’s support as the custodian of critical capabilities both internally and externally.”

He cited Denel’s technical support of SANDF helicopters deployed during recent floods in KwaZulu-Natal, as well as the July unrest in that province. This is further underscored by the Rooivalk and Oryx helicopters – of which Denel is the OEM – in United Nations (UN) peace support operations in the eastern Democratic Republic of Congo (DRC). Denel also supports SANDF equipment, including C-130BZ Hercules aircraft, serving the SADC mission in northern Mozambique.

Importantly, the new strategic direction enjoys the support of Denel’s shareholder, the Department of Public Enterprises, as well as the Denel board. Saloojee added that the relationship with the Government will be strengthened through a formal Memorandum of Cooperation with the Department of Defence and Armscor to ensure alignment on sovereign and strategic capabilities.

Saloojee stressed the point that the simplicity of the strategy can ensure its success. “We know the dire situation in which Denel finds itself, but we know where we want to be, i.e. the end state.”

He argued that the immediate requirement was to stabilise the company (“stop the bleeding”), which has to a degree been achieved through the medical benefit trust surplus, and to unlock the order pipeline that he is confident can be done in the next 12 to 18 months.

The sale of non-core assets is progressing well, which could bring in around R1.2 billion. A case in point is Denel’s current 20 per cent shareholding in Hensoldt, that is “imminent”, according to board chair Gloria Serobe.

“The current problem remains the fixed cost of our business that is far in excess of the revenue and executable business,” Saloojee stated. “The only way for Denel to support itself is through a deep restructuring and reduction of the cost base to affordable levels.”

In this regard, higher levels of efficiency will be achieved through the restructuring by adopting a smaller geographic footprint and streamlining policies and processes. This will include the engineering, manufacturing, and support environment.

“We intend to grow long-term strategic partnerships with the local defence and technology sectors and entrench our position in the local and international markets. The value of these partnerships is threefold, namely to access to markets, new technology and financial support,” Saloojee said.

Denel will establish “smart partnerships” with the local defence industry to ensure jobs are created within the wider sector. The planned growth path is projected to result in an estimated 1 000 high-quality direct jobs in the industry within the next three years and some 5 000 jobs by 2027.

Recently appointed to lead Denel’s restructuring and turnaround, Saloojee is a former Group CEO forced out during the state capture era by a Denel board that was appointed in 2015. The Zondo commission into state capture made findings against the erstwhile Minister and chairman Daniel Mantsha along with his board members.