Denel posts another loss

Denel, the state arsenal, has posted a loss of over half-a-billion rand for the financial year to March 31.

The R544 million net loss compares to a loss of R347 million the year before.

The company says prior to accounting for the losses in its Aerostructures and Missiles businesses as well as interest payments, it posted a profit of R33 million “which compares very favourably with the previous year`s comparable loss of R201 million.
“This clearly demonstrates the viability of most entities and progress made in the execution of Denel`s restructuring strategy,” CE Talib Sadik said at a press conference at Denel`s corporate headquarters at Irene, south of Pretoria, this morning.
Denel last posted a net profit – R24.1 million – in 2001. In 1997 it reported profits of R81.5 million. At its nadir – in 2006 – the company fell R1.6 billion short of breaking even.  
Sadik says the “normalised loss” for the year-to-March is R242 million versus R307 million the year before.
The Denel CE says the company achieved several key milestones in the year despite the global financial turmoil.
Highlights include the turnaround of nine of Denel`s 11 businesses and revenue-per-employee increasing from R353 000 in 2006 to R774 000 in 2009.
Sadik also confirmed that Denel spent R1.2 billion on research and development in the last book year, “representing in excess of 20% of total revenue”.
Direct employment now stands at approximately 3500 technically skilled employees including in excess of 400 specialist engineers and scientists, sustaining over 30 000 technical jobs in South Africa.
Denel also provided work packages to a number of specialised locally based SMME engineering companies, as well as technical exposure/training opportunities to over 5500 South African school learners and university students, Sadik elaborates. 
Also completed is the industrial recapitalisation programme at Denel`s Aerostructures business, in partnership with SAAB, totalling R400 million; and the establishment of advanced large-structure composites manufacturing processes and certified support processes.
Sadik says Denel is also standing by for government approval to successfully conclude an equity partnership for its missile business, currently in the Denel Dynamics stable. Talk at the Paris Air Show in June was that the partner was EADS missile subsidiary MBDA but company officials are mum on the point.
The Denel CE says audits performed by internationally recognised consultants underscore that the sustainability “of this world-class business is dependent on securing a reputable strategic equity partner to provide market access, specifically serial production orders.”
“This business is not sustainable due to the lack of multi-year production-related orders that are required to underpin the substantial non-scaleable development-orientated, fixed costs associated with having the world-class full missile capability required by our Department of Defence (DoD).
“In their findings, the consultants confirmed that efficiency levels in the business approach world-class standards (in terms of its industrial capabilities and product portfolio), and, in some respects, is even best in class.
“In their collective view, Denel`s missiles revenue challenge can only be solved by improving and stabilising its multi-year order book through increased global market access. These issues are being addressed and expected to bring the required revenue stream to secure this business domain well into the future.”
Relating to Denel`s Aerostructures investment, Sadik explained an impairment of R172 million in DSA`s finances was “due to material slippages in its overly ambitious business plan which had under-estimated the impact of the R400 million industrial recapitalisation programme, and the uncontrollable delay in the Airbus A400m programme.
“An aggressive turnaround plan has been implemented since February 2009, which is showing significant operational improvement. Through mutual agreement with SAAB, the board and internal management were strengthened.
“The level of industrialisation through the recapitalisation has also been improved, including the adoption of new technologies, systems and processes. The company is well positioned for growth. The key challenge ahead relates to growing the revenue pipeline through a multi-year order book.”
Sadik blamed Denel`s interest expenses on “non-recapitalisation by the shareholder”.
At present the group is funded mainly by interest-bearing borrowings amounting to R1.1 billion, backed by government guarantees, as opposed to share capital.
As a result, interest payments spiked to R86 million in the year-to-March as opposed to R67 million the year before.
“Without these three figures, Denel would have posted its first profit in almost a decade. If a similar adjustment is made regarding these areas with respect to the previous year, one can see that the business as a whole has effectively moved from a loss of R201 million to a profit of R33 million,” Sadik says.
Looking ahead
“Overall, Denel has improved its performance significantly over the past five years from a loss of R1.6 billion in 2006.
In 2006, Denel provided R554 million for contract loss provisions whilst for the past year, the amount reduced to R57 million.
The group`s total order book is currently standing at R17.8 billion compared to R3.8 billion in 2006, while its total revenue increased to R5.1 billon, including R2 billon in export sales. Denel`s share of revenue increased by 4% to R4.1 billion from the previous year and from R2.8 billion in 2006.
Key challenges for the group in the year ahead include:
·        Successful turnaround of its Aerostructures business, including improving the revenue pipeline and achieving clarity relating to the production rollout of the A400m;
·        Successful achievement of development milestones associated with its next-generation unmanned aerial vehicle (UAV) system: the Seeker 400; the A-Darter; and Badger ICV;
·        Strengthening the balance sheet through reducing working capital requirements and debt through higher levels of stable serial production, improved industrialisation, supply chain management, contracting and continuing its recapitalisation discussions;
·        Commencing a targeted R300 million industrial recapitalisation programme at the recently established Rheinmetall Denel Munitions business over a period of five years;
·        Effective rollout of Denel`s new growth strategy namely: improve access to sustainable markets, deepening Denel`s relationship with the DoD and other state agencies; operational excellence; strengthening governance and financial management; and positioning towards a respected South African company.

Pic: Denel CE-Talib Sadik