Denel has turned the corner and the future looks good

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Denel has strengthened its reputation as a high-performing technology powerhouse in Africa, a global player in the defence and aerospace environments and a company with the capacity to expand in the broader manufacturing sectors.

The company’s financial results for 2013/2014 show revenue growth of 17%, improved profits and the largest multi-year order book in its history — more than R30 billion to be executed over the next 20 years.
“We can safely state Denel has now returned to profitability on a sustainable basis,” Group Chief Executive, Riaz Saloojee, said.
“We have achieved the envisaged turnaround and are well on our way to move the company from being a good to a great company – in the process meeting shareholder expectations and transforming Denel into a valuable and self-supporting national asset.”

As a state-owned company, Denel has a primary mandate to supply the South African defence and security environment with strategic technology capabilities, products, services and support.

However, the company is also poised to play an expanded role in the industrial development of South Africa and in meeting the developmental objectives of government as set out in the National Development Plan (NDP) and the Industrial Policy Action Plan (IPAP).
“Denel is growing from being a predominantly defence company into a broader technology clearing-house that can use the skills, knowledge and expertise we have accumulated in the defence arena to add value to high-tech engineering and manufacturing programmes to revitalise the country’s infrastructure,” Saloojee said when presenting the annual financial statements in Centurion today.

The company supports the view that state-owned companies must serve as strategic instruments of industrial policy and economic inclusion. This is also reflected in the Group’s spending of more than half a billion Rand on research and development and a further R64 million on skills development and training.
“Our defence and aerospace businesses are in great shape. We expect government will soon commence with implementation of the recommendations of the 2014 Defence Review.
“The local defence industry, including Denel, will benefit greatly from the recommendations and the imminent establishment of a National Defence Industry Council to consult with government on issues such as joint planning, policy formulation, export support and future defence acquisitions.”

In the past financial year the Group’s revenue has grown by 17% to R4,58 billion mostly attributable to a 28% surge in exports. Exports now account for 50% of total revenue including participation in a number of countries in the Middle East, Asia and South America for the development and production of missiles, turrets for infantry combat vehicles, the manufacturing of advanced aerostructures for military and civilian airlift and the utilisation of the Denel Overberg Test Range by international clients.

Denel is also confident its delivery on key local defence requirements such as the rejuvenation of the Army’s fleet of armoured and transport vehicles as well as investments in the maritime environment and the civil security arena will boost locally earned revenue in years to come.

The Group’s net profit has improved by R123 million to R194 million and the operating profit grew by 91%. Denel’s debt to equity ratio has seen a significant improvement over the past two years from a ratio of 2.8:1 in 2012 to 1.1:1 in 2014. Denel is targeting a ratio of 0.5 in the medium term.

Earnings before interest and tax show a continuous upward trend which can largely be attributed to the growing export revenue, the weakening of the rand and a 12% reduction in operating costs, mostly achieved by cost optimisation initiatives. Denel’s improved financial performance has been recognised by Fitch Ratings which recently upgrade its rating to an ‘AAA’ (zaf), confirming its confidence in Denel as a good performing company with a large order book, strong management and governance and solid support from the shareholder.

GROWTH PROSPECTS

Denel’s marketing and business development activities over the past years have resulted in a substantially improved outlook for the company over the next decade. This confirms the wisdom of its initiatives to vigorously market the company’s products and services, invest strongly in R&D, make wise decisions on new acquisitions and expand international partnerships.
“The order book for projects to be executed in the next 10 years has grown to R32 billion. This is an exceptional achievement for Denel and represents a six-fold cover of our revenue,” Saloojee said.
“Denel is aware of the fact its future growth will be largely dependent on its ability to remain competitive in a global high-technology environment. We are committed to increasing investments in future capabilities and technologies, fostering innovation and expanding product offerings.”

Denel has diversified into the space domain. During the year the Spaceteq business unit was set up in Western Cape and has commenced with its first project, an earth observation satellite for commissioning by the SANSA (South African National Space Agency) by 2017. The group also embarked on a process to ensure higher levels of productivity and efficiency in support of broader efforts to reduce operating costs. At the Denel ammunition plant, PMP, this will result in a selected plant renewal process to address operational efficiencies and reduce energy consumption.

Other areas identified for modernisation include the company’s business units responsible for unmanned aerial vehicle systems, artillery and the delivery of aircraft maintenance, repair and overhaul (MRO) services.

In addition, in the short-to-medium term, Denel will diversify further into the civil security arena as well as the command and control environment. The company has also identified the maritime environment as a future capability, which will be established to specifically focus in the area of systems integration. Right now Denel is in the process of acquiring the BAE Systems’ LSSA business. The acquisition, not yet finalised is at a sensitive stage pending some key regulatory approvals and will form part of Denel’s growth and sustainability strategy started five years ago.

Products such as Rooivalk have focused renewed global attention on the unique capabilities of Denel and the broader South African defence industry in a highly competitive technology environment. It has strengthened our reputation as an industry leader in the design, industrialisation and manufacturing of innovative defence and aerospace products and system.

The BAE Systems LSSA transaction fits with the strategy to achieve revenue growth, improve efficiencies while at the same time modernising Denel technology and capabilities in the landward environment.

Denel supports the view that state-owned companies must contribute to the broader socio-economic transformation efforts and address the challenges of poverty, inequality and unemployment.

In the past year Denel has increased its spend on research and development to R507 million, invested R64 million in skills development and increased its activities in science and maths teaching, bursaries for tertiary studies and internships for deserving students.

Looking ahead Saloojee said: “Our strategic themes continue to be revenue growth, productivity and efficiency, fostering innovation and building on our commitment to transformation and the development of our human resources.

The essence of our revenue growth strategy is to further increase the order book, build stronger relationships with customers and stakeholders and leverage on our existing local and international partnerships to secure more business”.

Many of Denel’s business units and divisions have built their global reputations for world-class defence and security related products and systems over many decades. The company’s products have proven their value in operational deployments – both inside South Africa and in the regional and international arenas.

Although defence and aerospace will remain the mainstay of Denel’s business for decades to come there will also be growing opportunities to co-operate with other state-owned companies and the private sector in areas where its technology, research and accumulated expertise can add value.

This is in line with the stated objectives of the Department of Public Enterprises that state-owned companies must increase levels of co-operation and share services, technology and knowledge to deliver greater value and increased efficiencies to the people of South Africa.
“We have already seen this approach in practice with the recent contract awarded to Denel Aviation to deliver helicopter services and maintenance work to the Transnet National Ports Authority,” Saloojee said.

Discussions are also underway with the departments of Public Enterprises and Trade and Industry to secure national industrial participation work packages for the local aerospace industry when SAA and SA Express proceed with the procurement of new aircraft fleets.



Denel has already announced its intention to become involved in the revitalisation of rolling stock by the Passenger Rail Agency of South Africa (PRASA). Technology and processes used by Denel in the manufacturing of aerostructures can also be used to produce the interiors of modern passenger rail coaches.