Denel profitable for third year running


State owned defence company Denel has posted a R71 million net profit for the last financial year, its third year in the black. Net profit grew by R30 million compared to the previous year’s results.

During a press conference this morning at which Denel presented its annual results, Public Enterprises Minister Malusi Gigaba said that Denel had grown revenue by 10% over the last year and increased exports by 34%, as the company has again improved performance, in spite of difficult market conditions. Exports grew from R1 329 million to R1 783 million during the 2012/13 financial year, particularly within the company’s missile and landward defence businesses.

Gigaba mentioned the third A400M component contract with Denel Aerostructures, the acquisition of LMT, the accreditation of Denel Aviation as a maintenance, repair and overhaul facility for Russian Helicopters and the joint venture with Tawazun Dynamics as examples of profitable growth. Denel has R22 billion worth of contracts to fulfil over the next seven to ten years.
“However, the company is not yet out of the financial woods,” the minister cautioned. Gigaba said the global economic downturn has continued to impact the growth prospects of industry around the globe, with the defence sector being especially hard hit. He cautioned that this trend would continue into the foreseeable future, but that emerging markets were resilient. For that reason Denel is directing its focus at African markets.

Denel said its net profit for the year grew to R71 million as a result of the increase in revenue, cost saving measures and restructuring of the company – 11 business were integrated into six divisions. Operating expenditure decreased from 27% to 24% of revenue, but Denel is concerned about interest on borrowed money and losses incurred by Denel Aerostructures. The latter is the only entity in the Denel group that posted a loss for the 2012/13 financial year, but its losses have been significantly reduced. The R51 million net loss posted by the division improved by 35% compared to the previous year.

Due to concerns about its debt, Denel restructured its short-term debt of R1.185 billion to a combination of short-term debt and three-year and five-year bonds to mitigate liquidity risks.
“Denel’s financial performance and our prospects for growth were recognised in the financial markets through an over-subscription on the Denel bond issue,” the company said. “During the year, Fitch Ratings revised the Denel long-term rating from negative to stable – which is a very positive achievement for the company considering the downgrades experienced by other companies and institutions during this period.”

Riaz Saloojee, Denel Group CEO, said that Denel has now entered a trajectory of sustained growth. He told journalists that the company contributes significantly to South Africa’s growth and development and offers a wide range of quality products, from guided missiles to artillery, products that “are competing head-on with international competitors.” He said Denel would continue to grow exports in all key target markets, notably Africa, the Middle East, Asia-Pacific and South America. Local revenue amounts to 55% (R2 135 million) of total revenue.

Gigaba said the Department of Public Enterprises’ (DPE’s) aim was to grow Denel into a global company. Investing in research and development is part of this strategy – Denel has invested R528 million in research and development during the past year, including R142 million from its own funds. Gigaba said this amounted to 3.5% of the company’s turnover, .5% more than targeted.

At least R46-million was spent in skills development within the 2012/13 financial year, dominantly focussed on engineering and technological disciplines. Denel is concerned that it will lose scarce skills as many of its engineers reach retirement age.

Gigaba said he expected Denel to be returned to operational profitability and that the Department of Public Enterprises has directed Denel’s board to develop a comprehensive African strategy so that Denel can leverage off the government’s diplomatic footprint on the continent.

Some of Denel’s significant projects for the 2012/13 financial year included the successful completion of humanitarian demining operations and the disposal of remnants of war in South Sudan, the Democratic Republic of the Congo, Senegal, Libya, Angola and Mozambique.

However, Mechem’s demining operations have been marred by the death of personnel in Somalia and the kidnapping of workers in Senegal. “The death of two Denel Mechem employees in Mogadishu, Somalia, was a tragic reminder that sometimes our activities expose our employees to risk,” Gigaba said.

Other highlights for the last financial year include successful unmanned aerial vehicle (UAV) surveillance services provided to SANPARKS in the Kruger national Park in support of anti-rhino poaching activities, the delivery of the final upgraded Rooivalk combat helicopter to the South African Air Force, the establishment of a joint venture with Tawazun Holdings in the United Arab Emirates for the manufacture of guided weapons, the acquisition of local company LMT, the maintenance, repair and overhaul of Russian Helicopters aircraft at Denel Aviation and the participation in numerous international defence exhibitions.

On the missile side, Denel highlighted the final development and qualification of the A-Darter, 5th generation air-to-air missile in collaboration with Brazil and the development of the Marlin missile project, aimed at establishing a common platform for long-range all weather air-to-air and surface-to-air missiles.

A big local achievement is the development of the Badger infantry fighting vehicle under the South African National Defence Force’s Project Hoefyster. To date more than 100 local sub-contractors are actively involved in this programme. A production contract has been approved and will be awarded by Armscor later this year.

For the future, Denel is predicting significant revenue over the medium term, and that the company is sure it will continue to be profitable and sustainable into the foreseeable future.
“As our national defence force is becoming more involved in international peace-keeping missions in Africa, Denel remains committed to supporting our forces with leading edge technologies and products. This includes in the fields of observation, command and control, and other systems to enhance inter-operability,” the company said.

It expects to be involved in local projects such as infantry combat vehicles, expanded ground-based air defence systems (GBADS), and the acquisition of aircraft for maritime reconnaissance.