Denel focusing on African and other emerging markets

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Denel is focusing its attention on sub-Saharan Africa and emerging markets in the Middle East and Southeast Asia as it eyes significant opportunities in these regions, according to Denel Group CEO Riaaz Saloojee.

“From Denel’s strategic perspective, a significant opportunities pipeline is emerging within certain very key geopolitical environments, namely Southeast Asia, the Middle East, Latin America and South Africa,” Saloojee told defenceWeb.

There is special emphasis on the sub-Saharan African market as “it’s an undeniable fact that Africa is an emerging powerhouse,” he said. Some of the key focus countries include the Congo, Rwanda, Uganda, Kenya, Nigeria and others in the Central, East and West African regions. Denel is also engaged in humanitarian activity in countries like South Sudan, where it is busy with de-mining work.

One key market is Algeria, where Denel will be supplying equipment for the Navy’s recently purchased Meko frigates. Denel wants to focus on being a system integrator and prime contractor, as the group offers a wide variety of solutions.

In a presentation to the select committee on labour and public enterprises in May this year, Denel revealed that for 2010/2011, 56% of its sales came from South Africa while 19% came from the Middle East, 13% from Europe, 6% from North America, 2% from Africa, 1% from South America and 3% from the Asia-Pacific.

In its annual report for the 2012 year ending March 31, Denel noted that South Africa accounted for most of its revenue (R2.2 billion), followed by sub-Saharan Africa (R356 million), the Middle East (R295 million), Europe (R247 million), the Asia Pacific (R241 million) and South America (R182 million).

During 2011/12 Denel secured approximately R5 billion in export orders that will be executed over the next five to seven years. Future growth opportunities are underpinned by export orders already concluded as well as local defence orders expected to become operational in the next 24 months.

A challenge to Denel is the global recession and the dominance of Western firms in developed markets. “Market conditions are not yet where they should be. We still haven’t gotten over the recession,” Saloojee told defenceWeb.

Public Enterprises Minister Malusi Gigaba said that last year the global defence industry was in trouble due to the global economic and financial crisis. Last week whilst briefing the media on Denel’s annual results, he said that the situation had not changed and the industry would be in this situation for the foreseeable future.

Gigaba said that declining defence spending in the United States and Europe is being offset by rising defence expenditure in China, India and the Middle East. The minister added that most Denel business is projected to come from the East and Africa. “Denel will position itself to penetrate the African market. This will require strong and active shareholder support.” Such support involves leveraging the political good will of South Africa to pursue these markets.
“We’ve got to be clever,” Saloojee said. Denel is able to survive competition because it focuses on niche capabilities, such as mine protected vehicles, unmanned aerial vehicles and MRO (maintenance, repair and overhaul).

Indeed, when it comes to unmanned aerial vehicles (UAVs) Saloojee said Denel is “world class” – the Seeker 400 UAV, slated to fly later this year, is being marketed extensively and has already generated significant interest.

Some of Denel’s other key projects include the Badger Infantry Combat Vehicle for the South African National Defence Force, the upgrade of the Oryx helicopter and the delivery of the last upgraded Rooivalks for the South African Air Force.

The Hoefyster production contract, which is being undertaken by Denel Land Systems (DLS), will see the South African National Defence Force acquire 264 Badger infantry combat vehicles. Some of the weapons and components used on the Badger will be supplied to Malaysia under a 348 million euro contract. This covers 69 two-man turrets fitted with the GI-30 30 mm main gun, 54 missile turrets equipped with the GI-30 and Denel Dynamics Ingwe anti-tank missile system, 216 laser-guided Ingwe missiles and 54 remote control weapons systems.

An “exciting” opportunity for Denel to showcase its wares will be the Africa Aerospace and Defence exhibition at Air Force Base Waterkloof in September, which has a “very unique African flavour”. Saloojee said that Denel will be one of the biggest exhibitors with a “significant” presence. “AAD is a critically important event for us as it showcases the best South Africa has to offer…One of the reasons why it has been so successful is that it displays products and solutions appropriate to this [African] environment.” Saloojee noted that one of Denel’s greatest advantages was that, being based in Africa, it plays in a neutral space.

Saloojee went on to say that Denel is hoping to announce agreements and partnerships at AAD that will take the company to a new level. He added that the group was hoping for surprises at the show. “We are hoping to launch a new strategic vision for Denel.”

Last week Denel announced that it had posted a modest profit for the second successive year, generating R41 million of profit over the last financial year ending March, after consistent improvement in its financial performance. The Group generated cash of R210 million. This year’s profit is lower than for the 2010/2011 financial year but the prior year’s results (R111 million profit) were influenced by a significant once-off accounting gain from the restructuring of one of the company’s pension funds.

Saloojee said that Denel had been very inward-focused as it attempted to stem its losses, but now that the company is making a profit, it is starting to look outwards. However, he cautioned that it would take several years before Denel sees a strong recovery. He said that what was important was the improvement in financial performance. “We’ve stemmed the losses. If it wasn’t for Denel Aerostructures, Denel would be profitable.”

Saloojee said that, going forward, part of the shareholder’s mandate is to diversify Denel’s product range. Historically it has been difficult to diversify and Denel has struggled to do this in the past. Saloojee said the company wants to diversify into the civil security environment, such as disaster management, command and control, civil security, observation systems, protecting national assets, combating poaching etc. Border control is another key area to focus on.

Denel will be involved in the procurement of new aircraft for the South African Air Force, most likely as a systems integrator. It would play a similar role in Project Biro, the South African Navy’s programme for the procurement of new Offshore Patrol Vessels.

Saloojee told defenceWeb that it was difficult to predict the company’s profit for the next financial year, as a single contract could completely change the company’s bottom line. Going forward the company has several strategies to increase revenue, optimise cost and efficiency, strengthen the balance sheet and modernise technology. However, the order books of many of its entities have weakened over the last financial year. Nevertheless, Saloojee concluded that, “The potential of Denel is much more than what we’ve been able to realise up to now.”