Government owned defence industry conglomerate Denel posted a R395 million profit for the last financial year and maintains it is on a sustainable growth trajectory thanks, in part, to gains coming from “strategic decisions” to move the company up another level.
“The future looks positive and Denel’s performance serves to create a greater awareness of the qualities and capabilities of South Africa’s defence manufacturing sector and opens up new opportunities,” Denel Acting Group CEO Zwelakhe Ntshepe said during the release of its annual financial statements on August 23.
“The essence of our growth strategy lies in maintaining a continuous increase in the order book, which we will achieve by strengthening relationships with customers and other key stakeholders. In addition, we will leverage on existing global partnerships to secure future business. We are currently working on a number of initiatives to grow and diversify our business offerings.
“The results Denel presents support the view that the company is on a sustainable growth trajectory. In the financial year 2015/16, Denel’s revenue has grown by 41% to R8.228 billion. This is attributed to a six percent rise in exports which now account for 58% of total revenue,” Ntshepe said. Local revenue of R3.464 billion improved by 23% and export revenue grew by 57%.
“The company has achieved a net profit of R395 million, an increase of R125 million on the previous financial year. The Group’s earnings before interest and tax have improved by 59% to R637 million. This can largely be attributed to the growth in export revenue.
“In spite of the improvement in profitability; current debt to equity ratio is still not at an acceptable level. Plans have been developed to bring it down to acceptable levels,” Ntshepe said.
Denel’s order book was R35 billion last year, and is R29 billion this year, covering four years of production. However, the company is not happy with the current order book and is pushing hard on signing new deals in the next year or so. Growth is being driven by the multi-billion rand Hoefyster project, which is producing the Badger armoured vehicle for the SA Army and turrets for Malaysia, and Tawazun Dynamics, which is producing Al Tariq guided bombs for the United Arab Emirates.
Denel has a cash balance of R2.003 billion, an improvement of R94 million, but Acting Group Chief Financial Officer Odwa Mhlwana said that a lot of this is not accessible as it is linked to the Hoefyster project and only R600 million can actually be used. As a result, Denel will be re-examining its contracting mechanism with Armscor so that it can use this cash across the business.
Mhlwana said Denel is reducing its overburdened gearing to debt and will in the next five years get to levels the company is comfortable with regarding debt. For the last financial year, Denel said it had R3.717 billion in borrowings, an increase of R1.559 billion.
The 2015/16 financial year saw Denel spend R550 million on research and development and intellectual property development through own and client-funded investments. This includes producing a full-scale mockup of the Small African Regional Aircraft (SARA).
Ntshepe said Denel is looking for strategic partners to strengthen its position as a global player of note regarding aircraft maintenance, repair and overhaul (MRO). “Currently, our specific focus is on the sub-Saharan region. In addition, we are exploring opportunities for creating a baseload with MRO work from fellow state owned companies (SOC’s) operating civil aviation aircraft.”
Regarding personnel, Ntshepe said Denel has spent more than R5 million on its Corporate Social Investment project, the Schools Outreach Programme, and has invested R63 million over the last year on training and skills development.
The supply chain continues to be transformed, with 68% of the supply chain budget spent on local suppliers, with over R872-million allocation to black-owned companies. Spend on black women-owned companies grew from 2.8% to 9%, while the number of enterprise development beneficiaries in the same period grew from 67 companies to 120. “We are determined to grow these numbers in the years to come with a sharpened focus on black youth-owned companies, military veterans and enterprises owned by individuals with disabilities,” Ntshepe said.
Denel expects defence spending in Africa to increase in response to what it calls “genuine security needs arising from insurgent and rebel groups, the rise of piracy, economic growth and an emerging regional arms race”.
Mhlwana cautioned that selling defence equipment from South Africa as a home base is something that is running out as customers are increasingly requiring transfer of technology, the creation of in-country capacity and partnerships.
Regarding the matter of Denel Asia and alleged influence by the Guptas in setting up the joint venture between VR Laser and Denel, Mhlwana said the matter has been closed. “There was nothing wrong with the establishment of our vehicle [Denel Asia] there.” The establishment of Denel Asia was controversial as Denel did not first obtain approval from Treasury as required by the Public Finance Management Act. No company board members nor the minister of public enterprises Lynne Brown were at the financial results release to answer questions.
Mhlwana said Denel’s strategy is clear regarding growth, especially in the export market and the company needs to carefully select partners. In every export market including Asia, we are pursuing a strategy of partnerships,” he said. Asia was emphasised as a critical market for growth as it is the biggest defenced market in the world outside the United States.
Regarding the suspension of former group CE Riaz Salojee, chief financial officer Fikile Mhlontlo, and company secretary Elizabeth Africa in September 2015, Mhlwana said “we have concluded that the issues of suspensions our board has been concluded…and all of those issues are behind us. We are focusing on the new Denel under the new leadership.”