Denel posts modest R41 million profit


State-owned defence and aerospace company Denel has 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.

Fikile Mhlontlo, Denel’s Group Chief Financial Officer, said the improved financial performance can be attributed to a growth in export orders, improved efficiencies and a 67% reduction in the losses posted by its subsidiary, Denel Aerostructures.

Revenue improved by 10% to R3 568 million; net equity increased to R695 million and is projected to exceed the R1 billion mark following the allocation of R700 million to the aerostructures business in the 2012 National Budget, Denel announced today.
“We are pleased with a R700 million allocation to Denel in the 2012 National Budget to support the aerostructures business,” said Zoli Kunene, the Chairman of the Board of Denel. “This recapitalisation is evidence of the government’s commitment to support a viable aerostructure sector and the cash injection will enable the company to fund its working capital requirements while preparing for the serial manufacturing phase on the A400M programme.”

The R700 million has not been included in the year to March 31, 2012 results as the funds will only be disbursed in the current year that started April 1. The successful conclusion of negotiations between Denel and Airbus Military will ensure the longer term viability and, eventual, return to profitability of the company, Denel said.

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.

Shareholder support includes renewal of guarantees backing Denel’s debt. A turnaround of Denel is inextricably linked to securing new revenue streams, accessing bank facilities to execute new orders and ensuring improvements in operations. Denel is working with the Shareholder in exploring viable funding mechanisms to strengthen the company’s balance sheet.

Among the key defence programmes currently executed by Denel are:

The successful completion of important milestones on the development phase of a new mechanised infantry combat vehicle for the SANDF’s Project Hoefyster. Denel Land Systems is already geared to deliver on the production phase of this programme.

Denel Aviation has successfully delivered eight certified Rooivalk combat support helicopters to the SA Air Force with the remaining three aircraft scheduled for handover before the end of the current year.

The development of the A-Darter, a highly-sophisticated missile is on track as part of a collaboration programme between South Africa and Brazil.

Denel Dynamics has successfully completed flight clearance and integration programmes for firing the A-Darter from the Gripen fighter jet.

The maiden flight of the Seeker 400 Unmanned Aerial Vehicle (UAV) will take place before the end of 2012. The Seeker 400 has a maximum range of 750km and can stay up in the air for 16 hours.

Denel continues to invest a significant amount on Research and Development although the extent of self-funded portion compared to the industry benchmark is fairly low. R&D spend for the current year amounts to R752 million of which R178 million is self-funded.

The company needs to increase its investment in R&D to ensure that it stays ahead of the game and remain competitive and relevant, said Group Chief Executive Officer, Riaz Saloojee. “Our strategic focus is to continue modernising technology and improve our capabilities through innovation.”

Saloojee said the year-on-year improvement in the group’s financial performance is commendable but Denel is still faced with a challenge to generate positive cashflows in the short- to medium term. It continues to have a high debt gearing of approximately R1.85 billion but he is satisfied that there are adequate risk mitigations with strong prospects for growth and increasing profitability over the next five years.
“In the coming year the focus will be on closing key business opportunities, penetrating niche markets and strengthening cooperation between Denel and various state departments to ensure the conversion of export opportunities.”

Kunene said the company continues to meet its primary mandate as a custodian of key strategic defence capabilities and contributing to national developmental priorities such as skills development, enterprise growth and maintaining advanced manufacturing capabilities.
“Denel is a strategic national asset and should be viewed within this context,” said Kunene. “The company is on the road to a sustainable financial turnaround, bearing in mind that is has been loss-making for more than a decade.”

Denel continues to implement measures aimed at improving business development, optimising costs and efficiencies, as well as strengthening the balance sheet. There is a need for further restructuring of the company while revenue growth is the top priority, Denel said.

Kunene noted that Denel’s primary mandate is to supply the South African defence and security environment with strategic technology capability, products, services and support. In addition it contributes towards addressing broader national developmental priorities as defined in the National Growth Path and the Industrial Policy Action Plan.

This includes maintaining an advanced manufacturing and aerospace capability, strengthening the country’s skills and technology base, supporting enterprise development through downstream suppliers and fostering diversification to increase revenue and job creation.
“We are building a foundation from which we will build a long-term sustainable company,” said Saloojee. “This is underpinned by a revised vision for the company and strong commitments from our shareholder, the Government, to support the future growth of Denel.”

The Denel Group and its associates currently employ over 6 700 direct personnel. Taking into account global standards that the industry creates four downstream jobs for every formal employee this means that the company indirectly maintains or supports some 30 000 job opportunities.
“Our strategy is aimed at achieving over a three-year period a significant increase in revenue, optimising cost and efficiency, strengthening the balance sheet, modernising technology and transformation. We intend to ensure quicker conversion of order pipelines to orders especially in the export market,” said Saloojee.
“At the same time we will develop and implement measures aimed at optimising and reducing business costs through continuous improvements in efficiencies to ensure we stay competitive and remain in business.
“We are exploring a number of funding mechanisms with both financial institutions and the Shareholder. The indications are that there will in future be a hybrid funding model in place for Denel comprising a combination of recapitalisation, loans and government guarantees aimed at strengthening the balance sheet.
“The Board and executive management share a strategic intent to make Denel a dynamic, vibrant, financially sound and profitable organisation which has empowered its employees with regards to skills development, technology innovation, people retention and reflecting the transformation imperatives of the Government. This forms the foundation from which we will build a long-term sustainable company,” said Saloojee.